While the crashes of 2001 and 2008 were bad, they pale in comparison to damage done by the Flash Crash. While some blame circuit breaker alignment, others data volume and latency, and still others point at high frequency traders pulling liquidity, the macro question remains - how do we create a market that doesn’t fold under duress.
Senator Kaufman came out with a very thoughtful response to May 6, proposing a nine-point plan, focusing on accelerating the Securities and Exchange Commission’s market structure analysis and rule making, greater regulation of high frequency firms, reallocating market infrastructure cost based on message traffic, streamlining market data, centralizing and harmonizing market center rules, incentivize deep markets over speed and tight spreads, eliminating payment for order flow and market center rebates, draining dark pools, and eliminating the ban on locked markets.
While I don’t agree with all the Senator’s recommendations, he is clearly asking the right questions. How do we make the public markets safer, more stable and less volatile, especially during high volatility when natural liquidity is scarce?
The goal is to build a market that allows investor orders to interact in a non-intermediated way, provide liquidity when needed, and to allow investors of all stripes to trade fairly.
Today we have a fragmented structure where the markets are fast. Orders that can naturally match are intercepted by the speedy. Larger orders hide in dark pools. Market maker liquidity is temporal and algorithmic machines are the only way to safely trade.