If the answer is no, then we need more robust hardware and software that can handle the rush of orders; we can't have systems that lag behind in reporting trades, even for a microsecond.
Some other suggestions:
- Extend stock circuit breakers to cover the entire equity universe. Some have advocated "limit up, limit down" rules that futures exchanges have used for years, so if a stock drops 10 percent, trading is restricted for a certain period, say five minutes.
The difference between this and a trading halt is that with a "limit up, limit down" rule you can't make an offer 10 percent below the price, but you can make an offer above that price. So trading is not really halted. Then add windows, so you can't move more than 10 percent in five minutes, then after five minutes you can trade another 10 percent.
- Don't allow "clearly erroneous trades" to print. Once a trade prints, it becomes a nightmare making everyone whole. FINRA and the exchanges are considering clearer rules for breaking trades, which would require that trades only be broken once the stock has been halted and if it trades at a certain percent away from the price at which it was halted.
Fine-tuning the circuit breakers would also help. A number of stocks have been halted this summer due to clearly erroneous trades. NASDAQ has already proposed that if a single print falls outside the current trading range (the National Best Bid and Offer, or NBBO) they will not halt trading until three trades occur outside the NBBO. This is a sensible idea, providing it is adopted uniformly by all exchanges.
- More data on who is trading, what, and when. The SEC has been greatly hampered in its investigation of the flash crash by the humiliating reality that it had no readily available access to trade data. They have had to go begging to multiple market sources with requests for information.
Beefing up market surveillance and creating a better audit trail will increase the trust of all investors. The SEC has proposed a Consolidated Audit Trail System to track information on trading orders and is reviewing comments recently submitted by the public.
More information on what types of strategies are employed by high-frequency traders is also appropriate. HFTs do not need to divulge their algorithms, but we cannot guard against the small percentage of firms that may be using abusive trading strategies if we have no idea what anyone is doing.
- More information on the effect of dark pools and broker-dealer internalization and a closer look at "sub-pennying." About 25 percent of stock volume was executed in these "dark" markets in 2009, according to the SEC, and is likely higher now.
These venues do not display their bids and offers to the outside world (the "lit market").
It's not clear if removing that much liquidity from the rest of the market disadvantages everyone else. NASDAQ's chief economist, Frank Hatheway, has conducted a study which found that when internalization levels approach 40 percent of a stock's volume, price discovery is impaired.