A software malfunction on August 1 at Knight Capital Group
caused 45 minutes of chaos on the New York Stock Exchange,
opened a $400 million financial hole at the New
Jerseybased brokerage and sent a new wave of shivers
through financial markets about their vulnerability to
How did the U.S. Securities and Exchange Commission react?
It scheduled a market technology roundtable for
September 14 at its Washington headquarters. Pulling together
the desired panel of computer engineers and algorithmic trading
experts posed yet another challenge to an agency struggling to
keep pace with changes in equity market structures. The meeting
was pushed back to October 2 a full two months after the
The delay was probably not significant in the vast scheme of
things. More time for deliberation might even have been
beneficial. Behind the scenes a formal SEC investigation into
the events of August 1 had gotten under way, a Knight Capital
10-Q filing in November revealed.
But the wheels of regulation turn slowly. Top officials of
the SEC and its derivatives counterpart, the U.S. Commodity
Futures Trading Commission, repeatedly complain that they are
underfunded, and their technology is clearly deficient in
comparison with that of the biggest financial institutions.
Still, what became of the sense of urgency to safeguard
markets that flawed computer code can send hurtling out of
control? The CFTC and the SEC, where interim chairman Elisse
Walter was due to succeed Mary Schapiro in mid-December, have
been wrestling with these matters since the flash
crash of May 6, 2010, next to which the Knight glitch was
a well-contained blip.
I am worried that another disaster is coming,
CFTC commissioner Bart Chilton, an advocate of registration and
other controls on high frequency traders, said in November at
the Wholesale Markets Brokers Associations Sefcon
III conference in New York.
For all the time and attention regulators have devoted to
this issue, precious little action has been taken. Instead,
they have been focusing on writing rules under the Dodd-Frank
Wall Street Reform and Consumer Protection Act, a job that is
still only partly finished.
Given the arms-race mentality that pushed electronic markets
to their present perilous state, regulators might have to
become something akin to United Nations nuclear weapons
inspectors. That is the reasoning behind the consolidated
audit trail that the SEC approved in July to aggregate
all equity and options trading data for hypersurveillance. The
agency also formed the Office of Analytics and Research, led by
former RiskMetrics Group executive and hedge fund manager Gregg
Berman, a Prince¬ton University physics Ph.D., to build
sophisticated analytical engines to help stave off future flash