As noted above, not all participants agree on what constitutes an erroneous trade. Here are its three key proposals.Īgree on a standard definition of an erroneous trade. So how does iShares suggest that the SEC change the so-called market structure to prevent the next flash crash? In general, it wants clear agreement on how different exchanges should work together when there's a market breakdown. But that competition has also traded off speed of execution for quality - anyone who held Accenture ( ACN) stock and watched it tumble from $40 to six cents during the flash crash would agree.Īnd then there's the problem I wrote about on DailyFinance in which some high frequency traders buy market trade data and use the location of their computers close to those of the exchange to place orders a fraction of a second before those market trades are about to be executed - a form of trading in what I called insidery information. It has lowered trading costs and accelerated trade execution down to a fraction of a second. While Reg NMS boosted competition among exchanges, that competition has had a mixed effect for consumers of those exchanges. What strikes me as most interesting about these findings is that they undermine a basic tenet of America's antitrust laws - monopolies are bad and competition is good. IShares believes that these factors, coupled with an already volatile market and concerns about Greece's financial stability, all contributed to the flash crash.īenefits and Costs of Making Exchanges Competitive And these participants' computers were programmed to shut down and stop trading in the event that they received bad or mis-information. These different prices caused some market participants to lose confidence in the price information they were getting from the markets. Inconsistent rules for handling bad price information. This led different exchanges to quote very different prices for a specific stock. Some of the new electronic exchanges had rules that caused them to stop trading with exchanges that went into slow mode. Putting a person in charge of trading a stock was called slow-mode. The NYSE preserved a way to put people in charge - and take control away from the computers - in the event of a big percent change in a stock's price. These new exchanges had different ways of handling big ups and downs in the market. By 2010, a mere 15% to 17% of all NYSE trades were controlled by the NYSE (the new electronic exchanges controlled the rest).ĭifferent ways of trading with exchanges that go into so-called slow mode. In 2004, Regulation NMS changed all that - encouraging the emergence of new electronic exchanges like BATS and DirectEdge. Back then, 90% of stock trading occurred on the New York Stock Exchange (NYSE). In 1987, when we had the crash that took 22.6% off the Dow, trading execution was much slower and more concentrated. But Clements said that iShares research reveals three likely culprits:įragmentation among stock exchanges. I was amazed that Blackrock, which has a massive database of individual trades, was unable to pinpoint the cause of May's flash crash. iShares' spokesperson Leland Clements told me on Wednesday afternoon that while his company doesn't know exactly what caused the flash crash, it has three proposals to keep it from happening again. But not iShares, the Blackrock ( BLK) subsidiary that accounts for 50% of trading in exchange-traded funds (ETFs). Remember the flash crash? That was the 20 minutes on when the Dow lost almost 1,000 points before partially recovering.
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