The Securities and Exchange Commission may want to look more closely at the role of algorithms in U.S. capital markets, but the chief operating officer of NYSE Euronext said he does not think national securities regulators should get into the business or process of vetting mathematical formulas.
"I find really find it hard to believe they're going to put a very rigid structure around algo certification,’’ said Lawrence Liebowitz. "Anything that requires for example a regulator to look at code I don't think is feasible in any way."
His comments came at the end of a panel discussion Monday afternoon, at the Securities Industry and Financial Markets Association annual meeting.
It came in response to a question about whether limits should be placed on algorithms. An exchange in India requires algorithms to be vetted before “getting on the racetrack.”
Earlier, SEC chairman Mary L. Schapiro said the commission was looking closely at what the role of algorithms should be, whether there should be throttles on the algorithms depending on market activities and conditions, and the like.
"How do we deal with algorithms that go crazy and disrupt the marketplace?,'' she asked.
Without naming the stock or the date, she said one such incident was created by an algorithm that tried to execute trades involving 10 percent of the average daily volume in a particular stock in just two seconds.
That caused a "huge disruption,'' she said.
"I think it means greater accountability for the outcome of those algorithms," said George U. Sauter, managing director and chief investment officer at Vanguard, the mutual fund firm.
Brokers at Vanguard have responsibility for pre-execution credit controls, he said. “I think it gets down to who should use (algorithms) and how they should use them,’ he said. “And that's between the broker and the client."
The Nasdaq Stock Market and other exchanges have “taken steps to make sure” that algos do not disrupt market activity, said Eric W. Noll, executive vice president of Transaction Services for the Nasdaq OMX Group.
In particular, the exchanges have increased their pretrade risk management requirements and heightened the responsibilities for people sponsoring customers’ access to markets, directly.
"We have taken the concerns away about the runaway algorithm problem," he said.
But Leibowitz said there was room for more improvement, all up and down the transaction cycle.
"The big lesson out of May 6 wasn't that a money manager had a bad algorithm or anything like that,’’ Leibowitz said. “It was that almost at every stage of the chain people need to take more responsibility. Whether it was exchanges for allowing orders without price bands or not having any governors on them or brokers and how they route orders to the market, particularly stop loss orders, or institutional firms for understanding how broker algorithms are implemented, in fact, the lesson is we all have responsibility for creating a better market."
The question, he said, is "how did all hell break loose after somebody tried to sell X number of contracts. The market just should not behave that way.’’
Governors of other markets around the world were shocked, he said, by May 6.
"I think most of the world views our market structure as kind of a joke, to be completely honest,’’ he said.
NYSE Euronext “had the head of the European Commission at the (New York Stock) Exchange by total coincidence May 7 for breakfast," he said.
"He tried to be civil. 'What kind of circus are you running here'," he asked. "It wasn't a joke.”
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