The report from the joint committee looking into the flash crash on May 6 is out and calls for changes to curb the impact of high frequency trading, which should be a positive for issuer companies and IROs.
But many of the 14 recommendations from the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues actually strengthen the role of computerized trading and do not go far enough in reigning in abusive practices, according to some market observers.
‘From an IRO’s perspective, the recommendations are great if you want your stock to be owned by passive investors,’ says Tim Quast, managing director of ModernIR, an IR consulting firm. Quast criticises the majority of the panel’s recommendations as ‘price controls [that] suit machine traders but not value investors’.
He says many of the proposals, such as circuit breakers, ‘trade at’ rules that limit the ability of brokers to match orders off the displayed market prices, supervisory oversight of algorithms and restrictions on large orders, ‘appear to promote equality, but in fact create more arbitrage opportunity’.
Looking at the recommendations more broadly, Quast complains that many of the panel’s ideas increase uniformity of behaviour and thus risk. ‘Risk declines when many participants do dissimilar things – not when they all do the same thing,’ he says.
One recommendation favoured by Quast – and the focus of much media interest – is the imposition of fees for excessive use of immediate or cancel orders. Such a fee would curb traders who ‘try to change the price of stocks without buying or selling shares’ and ‘could bring down the level of noise’ in the market, he says.
Joe Saluzzi, co-head of the trading desk at Themis Trading, an independent institutional broker, also favours the fee but is less optimistic. ‘It will not be a recommendation for a fee on all cancellations,’ he says in a note to clients. ‘Rather it will be a recommendation for a fee on cancellations that exceed a firms ‘normal pattern’. Lots of wiggle room here folks.’
Saluzzi is more sanguine overall. ‘Yes, we were pleasantly surprised by some of what we heard,’ he tells IR magazine in an email. But Saluzzi adds that the panel did not address ‘any discussion of proprietary exchange data feeds, the proliferation of exchanges or minimum order life’.
The report, which was released on Friday, observed that ‘potentially systemic benefits and problems that arise from the growing volume of HFT participants in all of our markets – has been pervasive in our discussions’ and was reflected in the panel’s recommendations.
HFT has been blamed to varying degrees for the May 6 flash crash, when the Dow Jones Industrial Average plunged about 900 points and bounced back within minutes.
Highlighting the urgency and importance of its recommendations, the panel observed that ‘liquidity in a high-speed world is not a given,’ concluding that the flash crash posed a ‘challenge to investors’ confidence in the markets’.
The recommendations from the joint committee focused on three broad areas: modifying circuit breaker and other trading limits to address volatility, restrictions on co-location that give some market participants preferential access to market flow, and measures to enhance liquidity including incentives for traders to participate in unusual market conditions.