Are the flash crash fixers too tame?

February 18, 2011, 10:57 PM UTC

Regulators seeking a flash crash fix are looking at the right menu but have yet to show an appetite for anything really spicy.

So says John Bates, the chief technology officer at Progress Software (PRGS) and a member of the technological advisory committee advising trading watchdogs probing the market structure problems underlying the May 6 stock market meltdown.

Not this again

Bates applauds the report issued Friday by another panel, the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues, staffed by bigwigs such as former Commodity Futures Trading Commission chief Brooksley Born.

It urges that market overseers at the CFTC and the Securities and Exchange Commission take important steps such as coordinating market circuit breakers and creating a consolidated audit trail for U.S. stock markets.

Those steps could limit the damage from the next market gyration and make it easier for policymakers to see what actually caused the mayhem.

The report also represents an improvement on a September paper that was widely viewed as casting unnecessary blame on a single trade that was seen as the proximate cause of the May 6 crash. 

Friday’s report “does begin to examine structural inefficiencies and risks in our current market structure,” write the market mavens at Themis Trading, who have been rattling the unlevel playing field cage for some time now.

The latest report “deals with a lot of the right issues” with the current market structure, adds Bates. But he adds, “the question is whether they are perhaps not being quite aggressive enough when it comes to prevention.”

The implication, of course, is that they are not. Bates says he is “delighted to see the urgency” that the panel shows on the creation of a consolidated audit trail, which would give regulators a cleaner view into what’s actually happening in the market.

But he wonders why, if the CFTC and SEC are moving toward that sort of transparency, why they don’t go a step further and propose to monitor market action – with an eye toward abusive trading tactics — in real time. As he said in his October testimony before the CFTC:

Shouldn’t you have a NASA type launch-control system where you could see something flashing red and you could get on the phone or get in there and be able to alert people that something’s happening across all trading venues. Are these not things that we should perhaps be looking at?

You might well think so, though Bates said Friday he sees “no sign that they are looking toward a system that would enable detection of problems in the market. They are sort of looking more to fill the gaps.”

Of course, Bates has a dog in this race. His company makes, among other things, software that financial firms use to monitor trading risk in real time. One surmises he might be happy to sell such a thing to the regulators, were they interested.

This is not to question the motives of the CFTC and the SEC, which have a few balls in the air and probably not enough money to keep them all aloft. But if you’re hoping the solution to the stock market puzzle is a world in which someone in Washington is actually minding the store, better not to hold your breath.

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