GETCO: Flash Crash a Wake-up Call
Principals of high frequency trading group GETCO have provided the Financial Times with a detailed analysis suggesting that the May 6 Flash Crash illustrates the need for market reform in six areas.
GETCO founders Daniel Tierney and Stephen Schuler say that reform needs to encompass transparency, naked sponsor access, technology, flash order visibility, regulatory uniformity, and the role of market makers.
The Wall Street Journal evinced some surprise over GETCO’s expostulation.
The essay is particularly interesting because high-frequency traders have been accused of causing much of the flash crash, in which the Dow Jones industrial average plunged several hundred points in a matter of minutes before bouncing back and some stocks traded momentarily at a penny or less.
In a related article, Forbes seeks to winnow flash crash theories and line up some reasonable explanations. One area Forbes is concerned with, stub quotes, seems to echo GETCO’s interest in market makers.
Market makers are required to maintain active bid and ask prices for their stocks, and those prices are supposed to be legitimate. In practice, though, sometimes market makers do not want to trade and that is when they will offer those ridiculous spreads. There is never any intent to actually do business at those prices, but they are real offers and when computerized systems cannot find a better place to execute a trade, those stubs will get hit. That, in a nutshell, is how we saw some stocks trade for one cent on the day of the flash crash.
Doubtless attempts to parse the flash crash will continue to inform the Securities and Exchange Commission’s plans to refine Rule 613, which would establish a unified audit trail over transactions in a variety of markets and assets.
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