Repercussions and Lessons: Examining the Flash Crash a Year Later

April 5, 2011: Price Collars Proposed


The Securities and Exchange Commission proposed a "limit up and limit down" mechanism, to replace circuit breakers. If approved by the SEC, the mechanism would halt or slow down trades of a particular stock if the price moves 10% or more in a five-minute period. Based on the proposal, there would be a five-minute pause if trading is unable to occur within the price band for more than 15 seconds.

February 18, 2011: 14-Step Plan


The Joint Advisory Committee on Emerging Regulatory Issues gave the Commodity Futures Trading Commission and the Securities and Exchange Commission a 14-step list of fixes that included, among other items:


*Expand trading pauses -- i.e., circuit breaker -- to cover “all but the most inactively traded listed equity securities, ETFs, and options and single stock futures on those securities.”


*Enacting rules that provide “greater certainty as to which trades will be broken when there are multistock aberrant price movements.''


*Create a “second tier of pre-trade risk safeguards” with longer timeframes should be instituted when the “five second limit” does not bring back market participation.


*Impose strict supervision on firms implementing algorithmic order routing strategies


*Review the benefits and costs of directly restricting “disruptive trading activities “ in cases of extremely large orders or strategies.


*Examine “maker/taker” pricing practices, where makers of liquidity are subsidized for bringing orders to market and those taking liquidity pay fees, and look at pricing models for “peak load” use of exchanges, like in utility markets.


*Evaluate incentives that encourage parties to act as market makers, providing constant streams of buy and sell quotes.


*Explore ways to fairly allocate the costs imposed by high levels of order cancellations, including a uniform fee across all Exchange markets based on the average of order cancellations to actual transactions effected by a market participant.


*Analyze the impact of broker-dealers ‘internalizing’ the flow of customer orders and matching their orders with the broker’s own account.


*Study the costs and benefits of alternative routing requirements, including a “trade at” routing regime requiring trading venues and brokers to route an order to the best price in the market, unless they are holding or have posted a limit order at that price.


*Move with “a sense of urgency” on implementing a consolidated audit trail for U.S. equity markets.