October 12, 2010
I thank the Technology Advisory members for their participation and Chairman O’Malia and his staff for their work in putting this meeting together. While today’s meeting is not solely about May 6th and the Flash Crash, there is no escaping that we will discuss it. In that regard, it is a most appropriate time to meet, particularly given the release of the Flash Crash staff report and the role that technology, in particular algorithmic, robotic, or flash trading played in the market crash-and-rebound on May 6th.
There was an old comic strip from the 1930’s, Flash Gordon, that was made into a movie, an animated series, and recently (2008-09) into a television series that ran on the Sci Fi channel. A buddy of mine mentioned Flash Gordon to me the other day when we were talking about the Flash Crash. He said, as an aside, that the hero, Flash Gordon, was actually called “Speed” Gordon in Australia when it first came out because the word “flash” had a negative connotation associated with it at the time. Flash, being seen as flashy or showy or even dishonest, he said.
I’m not suggesting that this type of trading is bad. In fact, robotic trading has a lot of advantages – speed, access and better audit trails to name a few. And, I’m not suggesting that robotic trading is in anyway dishonest, or showy. In fact, it is anything but showy because we aren’t necessarily “shown” anything about how exactly how these individual flash, robotic or algorithmic programs execute. They don’t show us and we don’t know unless we ask because the trading programs are proprietary information. I understand that businesses need confidentiality. They need to keep their competitive edge. But, as we have seen, this type of trading can impact markets and lead to problems. So, as regulators and folks concerned about markets, and specifically technology in markets, it seems to me that we need to get a better handle on this trading, in a comprehensive, cross-market fashion. Should this agency have staff specifically dedicated to understanding how these type of programs work?
Finally, there are some news stories today raising questions about the Flash Crash report. That’s all good. Questions about government reports are expected and should be welcomed. That said, I want to comment specifically on the issue of the trade in question being price-sensitive. The CFTC-SEC staff report concludes, after exhaustive review and analysis of the May 6th trades, that the 75,000-contract e-mini trade was executed via an algorithmic trade and was price-insensitive. That means that the trade did not adjust during the algorithmic order flow due to price variations.
As most are aware, we are prohibited by the Commodity Exchange Act from revealing any information that would disclose individual trader positions, and so we are exceptionally careful in publicly addressing particular trades. That said, let me be clear that we are well aware of the nature of the algorithm utilized by the executing broker for this trade, and that analysis is reflected in the staff’s report. With regard to the allegations that this particular algorithm included a “braking mechanism” indicating some type of price sensitivity, I would caution against drawing specific conclusions when all you see is raw data. What may appear to be intentional “braking,” after all, may be due to other factors – volume, for example. Look at it this way, if we see a car slowing down, we might assume that the driver has tapped the brakes, but the reality may be that the car has simply hit an uphill grade. Again, I appreciate this type of public questioning, and will look forward to even more granular analyses of this issue, but I have every confidence, based upon what the executing broker has told our staff and what our staff – who has done extraordinary work here – has done to flesh out what took place on that day.
Whether talking about the Flash Crash or more generally about trading, we know regulators need to keep up with the high speed, high volume trading that goes on today. We need to have the ability to reboot markets when things go haywire. Venues like this – to address these types of issues with those of you who know the markets best – are why this group is so important. What we can learn from you is critical to how we will regulate in the future.
Last Updated: October 12, 2010