Pisani: Stock Trading Regulations Need Improvement
The best bid and offer should always be available, regardless of what exchange you are on. If the industry is opposed to a CLOB \(they are\), there should at least be access to a deeper level of liquidity.
- Raise the barriers to entry for exchanges. In theory, there is no reason you could not have 100 different exchanges, but in reality when you have 100 different pricing mechanisms, it would be tough for the market participants to figure out the most efficient way to route orders, let alone the difficulties regulating all these exchanges.
Finally, here's one suggestion that the SEC and the investing public should consider immediately:
- Educate the public to stop using market orders under most circumstances! People should think, what's the lowest price I really would sell this stock at? Nobody would sell a $40 stock for a penny, but with a market order that is what could happen—and vice versa! With a buy order, you could buy a stock up to infinity!
Many traders have proposed that everyone should use limit orders. This is a step in the right direction, but in a panic you can lose your shirt with a limit order too.
Here's an example: You own IBM at $128, and you have a limit order to sell at, say, $100 at the market. The problem with a market order is that in a panic it could get executed at $80 or worse. It's unlikely you wanted to sell at that price, particularly if it bounces right back to $128 an hour later.
One solution: A rule that the order would only be executed if the price was, say, within 20 percent up or down from the current price. So in the case above, the order would not be executed below $80 (20 percent below $100), even if you had a standing order. It would get kicked back to you, to ask if you really want to do this.
(Look for our "Man Vs. Machine" special reports Tuesday-Thursday, September 14-16, on "Squawk on the Street", 9am-11am ET and "Closing Bell," 3pm-5pm ET on CNBC.)