Quantcast

Two years after the 'flash crash,' markets are still vulnerable

By Bart Chilton

McClatchy-Tribune News Service

Published: Friday, May 11 2012 12:00 a.m. MDT

Traders and Specialists work the trading floor of the New York Stock Exchange as the DOW heads down in the afternoon hours Friday, June 20, 2008 (AP Photo/David Karp)

DAVID KARP, AP

Enlarge photo»

Two years ago, the Dow Jones industrial average dropped nearly 1,000 points in a few, short minutes. It was major, and extremely fast, market meltdown. There was a lot of damage and the government set out to find the culprits (when in doubt, conduct a study).

The blame game revealed that the size and speed of the "Flash Crash" would not have taken place in markets were it not for automated computer trading programs utilized by relatively new traders I call "cheetahs" because of their incredible speed. The problem is: since the crash, nothing has been done to cage the financial cheetahs.

Just think about the incredible financial markets that see 160 million transactions each day. The markets are churning and burning up the fiber-optics as cheetahs arbitrage between one market or another all across the globe in an effort to scoop up micro-dollars in milli-seconds. It is just incredible. And by the way, the Flash Crash took place late in the trading day. Had it taken place earlier, when European markets were open, it could have been much worse.

Even more incredible is that two years after that event, regulators still don't even require cheetahs to be registered with any government oversight agency. It is nuts. We all know that there are potentially significant downsides when technology doesn't work like it shoulda, woulda or coulda. We have the evidence that we can all become victims to such problems in markets.

Think about it, the third-largest trader on the largest exchange in the world, based in Chicago, is a cheetah trader based in Eastern Europe. If regulators want to look at their books or records, even though they trade in the U.S., the cheetah isn't required to produce squat. Furthermore, neither are domestic cheetah traders. Unless a government agency gets a subpoena from a judge, the regulator is simply out of luck. When regulators don't have a handle on traders in markets, guess what happens? Well, think of the 2008 financial crisis.

It is time that Washington cage the financial cheetahs. I'm not suggesting that they become an endangered species, just that they be registered and have some legitimate protocols. For example, shouldn't they be required to test their programs? What if a program goes feral like we have seen time and again? Shouldn't there be kill switches to shut it down? But, nowhere in the often criticized Financial Reform law commonly referred to as Dodd-Frank are these cheetah traders even mentioned.

It is high time regulators not only learn from past mistakes (what a concept), but do something about it and cage the financial cheetahs.

Bart Chilton is a commissioner on the U.S. Commodity Futures Trading Commission.

Get The Deseret News Everywhere

Subscribe

Mobile

RSS