Opinion: SEC Gives An Edge to the Weak Players

We’ve learned today that three trading firms could not handle the volume they faced the day of the flash crash.

The Wall Street Journal reports Citadel and Knight both couldn’t handle the flood of orders. This marks three firms which reduced liquidity, whether by choice or not, at a moment when market participants wanted it most. (The third is the NYSE which says they got so many orders they decided to slow down trading, and some stocks didn’t trade for roughly 90 seconds.)

The market should punish these firms and likely would, by telling these players "we will not be sending trades to you if you don’t improve your platforms enough to handle moments like these." They need to reestablish confidence among their customers.

Instead, the SEC decided to regulate to the lowest-common-denominator. By announcing that all trading platforms will have to slow down when one slows down, they have given a pass to companies whose infrastructure clearly isn’t up to par.

The hidden cost will be this: Someone who would have started a better company, with better service, or a better platform, will not have a marketable product, because it will not be needed. Why bother, if the weakest player can always force a stop on everyone else? Better technology won’t be necessary, so why should a customer bother paying for it?

It will stifle innovation.

Traders who work from home will be the losers in this. Moments of volatility provide them great opportunity (and yes, great risk). Now they will lose those opportunities. So while the big guys will be able to access a floor broker, the guy at home will have to cool their heels waiting for no good reason.

Update ...

Knight has weighed in to clarify what it believes are misleading reports about its performance on May 6. It says it only experienced "minor issues late in the trading day." It points out 99.6% of its trades were executed without interruption.

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