by Paul Springer

High-frequency trading is undeniably the wave of the future, but computerized strategies continue to receive the stink eye from regulators and the public.

The specter of high-speed mistakes is haunting the markets, and AXA Rosenberg Group and Barr Rosenberg Research Center have agreed to pay over $200 million in a Securities and Exchange Commission settlement involving an algorithmic error.

Orinda, Calif.-based AXA has over $30 billion under management.

A problem with a Barr Rosenberg algorithm was discovered in 2009, the SEC says, but AXA decided not to disclose related performance problems for investors:

In late June 2009, a BRRC employee discovered an error in the Model’s computer code that was introduced in 2007 and effectively eliminated one of the key components in the Model for managing risk. This employee later discussed his finding in a meeting with senior ARG and BRRC officials and employees. A senior ARG and BRRC official (“Senior Official”) directed them to keep quiet about the error and to not inform others about it, and he directed that the error not be fixed at that time.

AXA came clean with clients in April of last year.

While SEC settlements over investment performance are not always able to calculate the exact damages to investors, in this case a hard number has been calculated. A consultant “determined that the error resulted in approximately $216,806,864 in losses across 608 client portfolios.”

AXA agreed to pay this amount to make clients whole, along with a civil penalty of $25 million. It also agreed to heighten its compliance efforts.

The complex algorithm was misused so that one of its variables fell out of the equation, leading to performance anomalies AXA blamed on other factors, like market volatility.

In Canada, The Globe and Mail recently examined trends in payment for order flow and noted that individual investors are often the ones paying the bill in make and take markets. The piece sparked feedback that was polarized – readers were either for or against HFT, with few fence riders.

In another article, The Globe says the dialogue surrounds the same issues:

The thread running through both sides of the argument is that one way or another, there are costs for having somebody willing and able to buy your shares if you want to sell immediately. In today’s market, that cost is paid through a fee that is mostly passed on to the HFT firms that have become modern day market makers. Prior to the entry of the HFTs, the cost was built into the bid-ask spread set up by market making brokers.

In the U.S., the SEC is looking at new ways to regulate HFT and algorithmic trading. Barron’s says that on Friday, commission Chairman Mary Schapiro made these remarks at a conference:

Given the potential for trading algorithms to cause severe trading disruptions and shake investor confidence, we are considering whether they should be subject to appropriate rules and controls. We are examining trading or other obligations that might be required of today’s de facto market makers: the high-frequency traders which account for over 50 percent of daily trading volume and supply much of the market’s liquidity.

Likewise, the Commodity Futures Trading Commission is considering measures to review trading algorithms. But if the highly compensated egg-heads that create these things make mistakes buried in millions of lines of code, can we really expect workaday bureaucrats to ferret out the problems?

Construction of collocation facilities and new trading platforms is taking place at an advancing rate all over the world. Exchanges and regulators live in shuddering fear of future flash crashes, but nobody wants to miss out on the HFT action.

As high-frequency trading comes to Turkey, markets are accepting a trade-off involving new opportunities against new risks. A report from The National on the new initiative in Instanbul says similar measures are being considered in the United Arab Emirate:

Regulators and traders argue that the liquidity gains inherent in opening up UAE markets to such strategies are worthwhile, even if it means being exposed to such threats as the Flash Crash that hit markets in the US this May…

For now, the practice remains far off for the UAE’s stock markets. But regulators in the capital say the Abu Dhabi Securities Exchange (ADX) is planning initiatives that could see algorithmic trading, as well as high-frequency trading, adopted.

Data Center Knowledge says the global web of HFT is about to get even bigger and faster, thanks to efforts by NYSE Euronext to develop plans it revealed last year. Earlier this year, the exchange sold all its space in its new collocation facility in New Jersey, the first of as many as 40 such centers.

“NYSE Euronext now says it will extend the reach of its low-latency trading operations and develop ‘liquidity hubs’ in smaller financial centers including Frankfurt, Tokyo and San Paulo,” DCK says.  “The expansion is already under way and 14 European locations are seen coming online in the first quarter of 2011.”

The increase in HFT and algorithmic strategies is bringing a new set of concerns to Australia, where regulators are still scratching their heads over this May’s flash crash in the U.S. “The latest Australian Securities and Investments Commission market assessment report highlights that regulators are still groping in the dark as they try to come to terms with the increasing use of high-frequency and algorithmic trading strategies,” reports the Business Spectator.

ASIC needs to figure out how the national exchange, the ASX, will deal with algo-driven orders and potential order errors, especially since Nomura’s Chi-X platform will complicate matters when it gets up and running next year. Chi-X will compete with the ASX, and The Spectator says other electronic exchanges on the way could lead to inter-market trading of the type that roiled trading during the flash crash.

One potential competitor is Societe Generale, which is about to roll out its Alpha-X platform in Japan and Australia. Sander Elzinga, Socgen’s co-head of execution services in the Asia-Pacific region, told Businessweek that Alpha-X will reduce trading costs and offer exclusivity:

“The core feature, besides price improvement, is that it’s only accessible through our algo trading strategies,” said Elzinga, referring to algorithmic trading. “Given that no one except our algos have access to Alpha X, clients feel secure that there’s no one who can make bad use of it.”

While market players in Japan want to keep up with the Joneses in the HFT department, not everyone is happy about it. The Bank of Japan’s deputy governor Kiyohiko Nishimura told a conference in Tokyo that computerized trading systems lack “common sense,” according to a Global Financial Strategy News report that says Nishimura wants to see soulless automated trading combined with the human touch. Such a melding would be advisable in unpredictable Flash-type situations:

In such circumstances, the human brain performs better than the digital computer. Thus, a mutually complementary relationship between algorithms and humans is absolutely crucial.

Back in the U.S., regulators are just beginning to deal with legal issues relating to trading technology. Intellectual property law is still trying to catch up with proprietary code issues, but the law did succeed in catching former Goldman Sachs coder Sergey Aleynikov. Aleynikov was arrested in the summer of 2009, after he left Goldman and the firm accused him of stealing secret HFT code.

Aside from determining Aleynikov’s guilt or innocence, the trial — which just started — will also test the relevance of trade secret laws to proprietary trading techniques. “The trial is also a test of the boundaries of the Economic Espionage Act, a 15-year-old law that makes it a crime to steal trade secrets,” The New York Times says.

One compelling dimension of the trial is the potential jail sentence. Rather than filing a civil suit against the programmer, Goldman set the stage for a criminal proceeding — and prison — by turning the matter over to federal investigators. If that choice marks a trend, it brings a whole new kind of risk to the table for programmers.

by Paul Springer

The world of high-frequency and quant trading often seems arcane and opaque, but it’s in the mainstream news this week. Here’s why — along with some arcane and opaque items too.

Forbes shows how Getco played a central role in the IPO trading of General Motors’ new stock. Sounds like a case of new technology meets old.

The Post Chronicle says former Societe Generale trader Samarth Agrawal’s code-napping case is soon to go to the jury after Agrawal copped to at least one of the charges.

RiskMetrics Group talks to the hand in an interview with quantitative guru Peter Hand, a former Barclays Global Investors research head now managing Yampa Quantitative.

FINalternatives hosts Q&A with NuWave Investment Management principal Troy Buckner, whose firm studies behavioral finance and trades futures in 44 markets.

hedgeweek describes a volatility antidote prescribed by Bloxham Midas Global Absolute Return Fund.

CSS Analytics reviews a Quantifiable Edges trade filter oscillator that works on 3- and 10-day volatility.

Goldman Sachs says the latest version of its REDIPlus platform has algorithms for both Canadian and US/CAD interlisted routing.

The Asset looks at CapVeda, India’s first market-neutral hedge fund, which uses algorithmic momentum trading among other strategies.

Benziga says it’s time to go against the HFT grain and slow down.

Image: Photos8

By Vince Chiofolo

The Wall Street elite — original early-adopters of the email-capable, web-enabled, personal digital assistants that allowed workaholics to get their constant fix – are beginning to switch their addiction to a series of new devices, leaving their old friend, the BlackBerry, in the dust.

Other smartphones, such as the iPhone and Android, seem to be picking up much of the Wall Street professional marketshare.

FierceFinance pointed out this week that some of the major banks, whose employees traditionally dared to touch no cell-phone bearing anything other than a BlackBerry emblem, are beginning to move towards the fancy new options.

Wells Fargo recently adopted corporate use of the iPhone. Other firms, like Morgan Stanley, are experimenting with iPad applications for clients. The firm recently launched a Morgan Stanley research app which allows institutional clients to view the analyst’s opinions of more than 2,600 companies along with their takes on the fixed income and currencies markets.

JPMorgan Chase and UBS, too, are experimenting with other gadgets such as the iPhone and Android for internal use, according to Bloomberg.

BlackBerry creator Research In Motion has its work cut out to fend off intruders who are continuing to add more business-related software applications into their products to pick up the PDA market that RIM once dominated.

Part of the impetus towards other markets comes from the squeezing out of arbitrage opportunities in more well known markets, where the window of opportunity for arbitrage has narrowed from minutes in the good old days to millionths of a second today.

Analysis from The Economist suggests that exchanges can develop HFT trading capabilities without breaking the bank — and attract traders from markets that have been fished out:

As markets in America and Europe have become more competitive—HFT now makes up over 60% of equity trades in America and nearly 50% of British transactions—bid-ask spreads have narrowed and arbitrage opportunities exist for ever-briefer periods. In newer markets, traders can use simpler algorithms for higher yields.

Outside the U.S., many exchanges currently offer much slower execution times than Nasdaq, and some of these market places still have a daily trading siesta where all activity ceases for an hour or more.

One exchange that is seeking to enhance its capabilities is Hong Kong Exchanges & Clearing, according to a Financial Times report that says aligning trading hours with that of the PRC’s is part of a larger plan.

“HKEx unveiled plans to upgrade its trading system, along with other Asian exchanges, as they gear up to attract the ‘high-frequency’ and algorithmic trading community that makes up a significant portion of trading activity on western exchanges,” Financial Times says.

In Thailand, UBS executive Robert Barnes told a conference at the Stock Exchange of Thailand (SET) that the platform is due for some changes. “Mr. Barnes suggested Thai regulators should look to allow multi-market algorithmic trades rather than a single-market approach, to best facilitate different trading strategies by investors,” according to The Bangkok Post.

Latin America is not standing idle, either. Complex Event Processing (CEP) technology provider StreamBase Systems has announced a partnership with Alphastream to foster algorithmic trading in Brazil, which is trying hard to accommodate new trading approaches and a surge in volume.

Meanwhile, efforts to offer collocation facilities are leading to mini-migrations in the U.S. and elsewhere. NYSE Euronext recently opened data centers in both the U.S. and the U.K. “NYSE Euronext expects its New Jersey data center and a similar facility in Basildon, England to house ecosystems of hedge funds and trading firms eager to conduct trades in microseconds,” according to datacenterknowledge.com.

Image from Photos8

Back in 2004, Trader Monthly ran a feature story about a gathering of fixed-income experts at a seminar hosted by UK analytics firm GannCorner. In addition to the chatter about new strategies and optimizing portfolio returns was gossip and speculation about a mysterious Eurex trader known around Europe only as “the Flipper.” At the time, attempts by other market participants to uncover the identity of “the Flipper,” who by then was the biggest trader on the Eurex, were frustratingly unsuccessful, due mainly to the anonymity that cyber-based trading allows.

The trader was thought to reside in Ireland at the time, and was notoriously known for aggressively working both sides of Eurex trades. It was the “steering of German government-bond futures markets in a tactical manner — posting substantial lot blocks, not all of which [were] traded upon, and doing so on both sides of the order book in numerous but nonetheless interconnected markets — that birthed the Flipper moniker,” according to Trader Monthly’s 2004 article.

At one point during the GannCorner event, one attendee stood up and asked the leader of the session if she had any information on the notorious Paul Rotter. “Yes, I know Paul Rotter,” she said bluntly. “He’s one of my clients. And he’s sitting right behind you.”

Since Paul Rotter’s unmasking as “The Flipper,” he has been as controversial as he is well-known in the world of electronic-trading. Rotter’s success coincided with the rise of the Eurex in 1996. The German/Swiss electronic futures exchange has been an undeniable powerhouse for international derivatives trading since its inception, and Rotter became very adept at utilizing the herd mentality prevalent there to his advantage.

Click for the original 2004 article

At age 9, Rotter moved to Germany from the Czech Republic (then Czechoslovakia) and later made his financial start as a trainee on the bond desk of a Frankfurt-based bank. Rotter climbed the ladder, and was soon trading the Deutsche Bund (German 10-year notes) in large lots. By the time he left the bank in 1996, Rotter was the biggest single trader in German debt futures on the Deutsche Termin-Börse, Germany’s derivatives exchange and precursor to the Eurex.

During “the Flipper’s” reign, fellow Bund and Bobl (short for German 5-year notes) traders began noticing giant orders placed on one side of the market that soon flipped and went the opposite way. Unbeknownst to them, Rotter was buying and holding massive buy orders until the inside market began moving close to his indicated price, then flip the position by going the other way instead — causing mass bewilderment for his fellow traders and whipsawing more than a few of them. Eventually, as Rotter was unmasked as “the Flipper,” he went to Switzerland to form his own shop, Rotter Invest, in 2001. He has kept a relatively low profile since; but, after reading the 2004 feature article in Trader Monthly, we were curious what Paul was doing these days.

We recently caught up with him to get additional details on his history, his take on the current market, and thoughts for the future:

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TraderDaily: You have a reputation for trading the Bund, along with Bobl and Schatz interest rate futures. What are you trading now? Is your emphasis still in Europe?

Rotter: I am still trading mainly the Bund and Bobl, but also heavily in the Eurostoxx because it is very liquid most of the time. Generally, I like markets with high liquidity. At moment, I am also relocating to Singapore and want to explore new trading opportunities in Asia. I am becoming a member on SGX, as they offer a variety of interesting products and their officials are very customer friendly.

TraderDaily: According to one report, you and Oliver Kinski first started trading on your own with $1.3 million in capital. Does one need more or less to start a successful trading operation today?

Rotter: At that time, we had some minimum margin requirements from our clearer. We were a DTB member and were thus connected directly into the exchange. There was no possibility for a pre-trade position limit; therefore, the clearer had to trust us to not overtrade. Today, the brokers offer you all kinds of trading software where they can set your limits based on your buying power or position size. Therefore, I think as a high frequency intraday trader, you could start with e.g. 300,000 EUR and aim for a profit of a few thousand Euros every day. If you plan to hire many traders quickly, and want to trade on many different exchanges, you would need more capital, especially if you need a membership on some exchanges. It is also important to choose the best location with the best technical infrastructure, low taxes, and a trader/investor-friendly environment.  I think the best place for traders right now is Singapore – it is growing rapidly and has a great lifestyle, very safe, with the best schools and world-class infrastructure.
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“In the old days, there were quiet periods with no data flow but, one machine starts creating…
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TraderDaily: Two statements from your website caught our eye. First, you state that “total control is an illusion”, and then you say “machines cannot yet replace highly skilled people.”How do you balance the use of technical and algorithmic trading with the input of human judgment? Likewise, when it comes to risk management: how much do you rely on computerized risk assessment as opposed to human expertise?

Rotter: Addressing the second point first, I do all my short term trading manually. For our longer-term positions, we use computer-based models that generate automatic entry signals.  My traders can exit two thirds of their positions at their discretion and the rest is liquidated when the exit signal is generated. These are mainly trend-following strategies and there could be good fundamental reasons to exit a part of the position before the trend reverses. On the other hand, risk management must be computerized, as there is no place for emotions. “Total control is an illusion” means that, for example, an exchange’s margins are based on recent volatilities and when some sudden unexpected event occurs, it could blow out a lot of traders even though their risk models were working just fine for a long period.

TraderDaily: Where do you draw the line between trading a market and manipulating it?

Rotter: This is the best question for all the regulators!  The answer is very easy: there is no line!  If you buy just one contract you already affect the market, especially with all the automated systems.  If you enter a small buy-order below the market and cancel it couple minutes later you always can see an immediate reaction in the order book.  Today, the algorithmic systems permanently enter orders and delete them very quickly to enter them again a second later…so what is manipulation?  In my opinion, there should be very clear and specific rules for this topic.

TraderDaily: You were once known as “The Flipper,” a term that arose from distrust of short-term traders. High frequency trading has been suspect in market distortions and events like the May 6 “Flash Crash”.  Do you think people are more or less skeptical of short-term trading than they were ten years ago?

Rotter: Basically, ten years ago, fully automated trading was not allowed and only locals were doing short term trading and providing liquidity. The typical locals were some unshaved guys sitting at arcades or smaller prop firms, dressed in just surf shorts and having their breakfast, lunch and dinner at their desks. Today, it is very fashionable to get involved in high frequency trading. My guess is that 70% of the volume is generated by algorithmic trading systems, so you can be sure that there will be more ”Flash Crashes” or ”Flash Squeezes” in the future. This could be great fun for some locals. And there we come back to the manipulation topic, as the Flash Crash was obviously caused or supported by the machines. In my opinion, people (especially regulators) will get more skeptical about this type of short-term trading.
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…a trend and the others follow, so today’s ‘sheep’ are also machines.”
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TraderDaily: Back in the 1990s, so-called “SOES Bandits” were criticized for gaming Nasdaq’s Small Order Execution System. Is there an equivalent of the SOES bandit in today’s world of electronic trading — for traders with relatively small amounts of capital, that is?

Rotter: I think it will be more and more a battle between machines, where the better ones try to destroy the smaller ones by learning from their behavior and trading against them.  In the old days, there were quiet periods with no data flow but, today  one machine can create a trend and the others will follow. Today´s ”sheep’ are also machines. I am pretty sure there are all kinds of similar ”bandits” in the different electronic markets.

TraderDaily: How helpful are $250 forex mini-accounts and products like the CFD (Certificates For Difference) to individuals who hope to parlay a small amount of capital into a fortune? Are these valuable tools or just the malt liquor of the financial world?

Rotter: In my opinion, this is just a kind of gambling similar to online poker. I know some smart guys who consistently make money in online poker, just taking it from all the gamblers. If you are not just a gambler, you need some professional equipment like news feeds, etc., and then, with the right strategy, you might turn even a small amount into a fortune. The biggest problem with these products is that you do not trade on an exchange and it is not regulated.  That means your counterparty is the broker who probably doesn’t even hedge your position. So, if you are too successful, the broker won’t like you, and kick you out or just not give you good fills. I’ve heard many stories like that. The broker is your counterparty; you must accept his prices and his fills. So, basically it is “malt liquor” for these brokers and not for the financial world. You definitely have much better chances playing online poker, as this is level playing field

TraderDaily: Long Term Capital Management’s Andrew Meriwether said in an interview with Michael Lewis that the downfall of LTCM was partly the result of copycat activity by executing brokers the firm had to use after the traders left Slomon Brothers. How do you avoid losing your “secret sauce” to institutions that clear or execute your trades?

Rotter: Unfortunately, I have always had worries about other participants watching my activity. It could be the clearer, the broker, the software provider, or even some technical staff at these companies. The main protection is to have accounts at different brokers so nobody knows your exact position.  Generally, I try to get in and out of large trades pretty quickly to avoid that anybody [attempting] to trade against me, but I am never sure.

TraderDaily: Your website says your “core competence is in trading financial derivatives, especially options and futures. On peak days, we trade contracts on the bond markets with a total value of up to €50 billion, more than many major banks.” Are you concerned that Basel II and other ongoing regulation efforts will make it harder to trade on such a large scale?

Rotter: This number doesn’t necessarily mean big position sizes.  When I get heavily involved in the markets, I executed hundreds of trades quickly, in a few hours – this is the real high-frequency trading.  I have been doing this now for more than 16 years and I’ve never really had a problem with any regulators. I am basically a “human” liquidity provider, which is important for any electronic market today.

TraderDaily: What happened to Greenhouse Capital Management, the firm you formed in 1998? Did you learn anything from that experience that you would want to pass on to others attempting to start a trading business involving a small number of traders?

Rotter: Greenhouse was a tremendous success for a short period of time.  Originally started by my good friends Oliver Kinski and Michael Mareneck in Dublin, it brought together some of the most active, creative and successful proprietary traders of the day into one company. It was a victim of its own success in a way. We wanted to raise capital to bring in even more traders and increase our market presence and we were positioning ourselves for an IPO when the Tech Bubble burst in March 2000.  The banks – not unlike their reaction to the economic turmoil of the last 2 years –  pulled in their horns and the situation changed overnight. We went from 8-10 banks courting us to no one even returning our phone calls.  From that point, everyone in the company was thinking different things about the future so we decided to wind down the company and go our separate ways.  The advice I would give others in a collaborative effort is to clearly define your objectives, make sure you will be fairly compensated for your best efforts, stick to what you do best, keep the structure lean, and don’t depend on others to make it happen.

TraderDaily: Is the overall mindset of the market and the “sheeple” trading in it different than it was five or ten years ago?

Rotter: Today the herd is the computers, and I think they are doing very well being the herd. The trends created by them are more dynamic then before.  They can reverse their mind very quickly and follow the opposite trend immediately, so I would call them the “dynamic herd”.

TraderDaily: How would you invest in BP if you had to do so today?

Rotter: I had an investment in BP for many years and sold it a bit too late.  I won´t invest in BP anymore, but it is great for trading.

TraderDaily: Thanks Paul!

Image: Photos8

While regulators continue to eye algorithmic trading as at least one factor in the May 6 Flash Crash, traders and programmers continue to push the limits of mathematical trading models and platforms.

Here are some recent developments:

• Financial Times/Alphaville: HFT and ETFs are among the players in a drama of distorted valuations and mob-ruled markets.
• Seeking Alpha: HFT is one factor that makes it harder to find uncorrelated stocks.
• Forbes: Some programmers are unhappy with a $100,000 annual salary when their codes are raking in that much in one day for employer firms.
• Reuters: A bunch of black-box commodity trading adviser funds did a noble job of weathering perilous economic times.
• Bloomberg: HFT awaits a regulatory inquisition in Europe.
• Bank of America has introduced ETF-aX: “This new ETF-specific algorithm analyzes market depth and price data across an ETF’s underlying portfolio to identify the most efficient combination of ETF, stock, and futures and then automatically trades them to source liquidity and find the best prices.”
• Hedge Funds Review: Technology only works if the short-range strategy is legit.
• The Economic Times: Algorithmic trading will squeeze the juice out of arbitrage between exchanges.
• Traders Magazine : UBS algorithmic trading head Oswain Self says in an interview that co-location, while viewed as an unfair advantage by some, serves to protect confidentiality of orders.
• Tabb Group: A new report, US Electronic Options Trading 2010: Algorithms, DMA and Crossing Networks, says trends include more demand for low-touch systems from buy-side and hedge fund traders.

The rise of electronic trading and electronic communication networks have made many physical trading floors obsolete, even as others redouble their efforts to stay alive. While the New York Stock Exchange and Chicago Board Options Exchange are in continuous motion, the Singapore Exchange (SGX) still has a lunch break.

Why not have quiet time and milk and cookies as well? But now SGX CEO Magnus Bocker is thinking about slashing the 90-minute siesta.

Bocker told conference attendees in Singapore that the lunch break may soon be a thing of the past, according to Channel News Asia.

Mr. Bocker said: “If we were to have continuous trading, that will support our brokers with extra volume of about 10 per cent. So many of the brokers and banks in our market are keen to see how we deal with this. I think it is a little bit too early to talk about implementation, but let us have a dialogue about it.”

In Japan, concerns with competition have led to proposals to cut a midday break and extend trading hours on the Tokyo Stock Exchange, according to Reuters.

Resistance to increasing trading time is suggestive of the resistance to change that has destroyed a variety of markets and businesses over the years. “The Tokyo bourse has considered extending hours in the past only to drop the idea amid opposition from traditional brokers worried about the cost of upgrading systems and hiring extra staff,” Reuters said.

Events like the May 6 flash crash have led some to wonder if the drive for faster electronic trading with less human input is heading us toward more trading debacles.

“The old system of floor traders matching buyers and sellers has been replaced by machines that process trades automatically, speeding the flow of buy and sell orders but also sometimes facilitating the kind of unexplained volatility that sent markets tumbling [on May 6],” said The Salt Lake Tribune.

Indeed, electronic trading systems are vulnerable to a wider variety of interruptions. In 1987, for instance, a squirrel shut down Nasdaq’s quote system for over an hour, according to The New York Times. In 1994, a second SquirrelGate incident turned off the system for about 30 minutes.

It remains unknown whether the same rodent was responsible for both incidents.

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.

In contrast, proposals relating to short selling have promoted deluges of comment letters, including so much from the lunatic fringe that the Commission has to triage the letters to indicate what portion derived from ill-informed cranks and all-around fools.

But the Rule 613 proposal has garnered only about a dozen or so epistles since the first arrived in May. Perhaps the scope of the project still has many market players scratching their heads—or calling their attorneys.

The Flash Crash gave new life to the SEC’s efforts to establish a comprehensive real-time system.

“Developing a consolidated audit trail has been under consideration for some time, but in the wake of the May 6 ‘Flash Crash’ it is seen as even more imperative,” according to analysis from law firm Katten. “Piecing together what happened on May 6 has proven time consuming and complicated for regulators, given the multiple sources of order and execution data for the various equity, option and futures exchanges.”

The goal is a watchful uniformity that will allow SROs to observe trading across a variety of platforms and hinder those who would cloak ownership interests in one area through derivative holdings in another.

Risk monitoring is also a factor, according to the SEC’s proposal. “Further, risks imposed on the markets by violative conduct can be substantially increased by automated trading, as market participants have the ability to trade numerous products and enormous volume in mere seconds. As trading venues have become more automated, and trading systems have become computerized, trading volumes have increased significantly, and trading has become more dispersed across more trading centers and therefore more difficult to monitor and trace.”

While the incarnation of the plan is a long way off, a new system would create a single, consolidated audit trail to replace the individual audit paths now available in the form of electronic bluesheets, FINRA’s OATS, National Securities Clearing Corporation’s Equity Cleared Reports, the NYSE OTS, the Consolidated Options Audit Trail System, and a few others as well as primary market transactions in debt securities.

The whole thing may sound like a record keeping nightmare, and one market participant told Bloomberg that compliance could be a major burden.

The “feasibility” of doing this in real time could be an issue, said Sapna Patel, head of market structure and liquidity strategy for the Americas at Morgan Stanley in New York. While a consolidated audit trail is an important tool for regulators, “the real-time aspects of collecting and providing this amount of information and data could be onerous from an implementation standpoint,” she said.

But the Commission says it might simplify record keeping for firms that currently need to paper multiple audit trails for several SROs.

The Commission also says a consolidated system would cut down on the games played with price quotes in different markets.

Another example where information on proprietary orders or quotations would be useful to have included in the consolidated audit trail is in the investigation of a possible ‘‘spoofing’’ allegation. In those cases, a market participant enters and may immediately cancel limit orders or quotations in a specific security with the intent of having those non-bona fide orders or quotations change the national best bid and national best offer (‘‘NBBO’’).

The comment period ends on August 9, and it is unknown how long the Commission will review the suggestions before crafting a response.