Remember the Flash Crash?—What's Next?

Remember the Flash Crash? We're three months from the one-year anniversary; what's next?

We have been waiting for a report from the Joint Advisory Committee of the SEC/CFTC, but it is not clear a report will be issued. Remember: there was a "findings" report from the Committee staff that was made to the Joint Advisory Committee, but the Committee itself never issued a report.

Why no report? The SEC has been overwhelmed with implementing the Dodd/Frank bill, so it's not surprising we have heard nothing from the Flash Crash commission in months.

That doesn't mean nothing is happening...whether they issue a report or not, it's likely the SEC will put out a notice and comment in the next month or so on at least one proposal: moving from circuit breakers to trading bands (limit up / limit down).

The difference between a "limit up/limit down" rule and circuit breakers is that with a "limit up, limit down" rule you cannot make an offer say, 10 percent below the price...but you CAN make an offer above that price. So trading is not really halted. This is the procedure used in equity futures trading.

They are also likely to detail plans for a centralized order tracking system to monitor all trades from a central source.

And quietly, the Exchanges are continuing to tweak the fixes already in place. Last week, the NYSE modified its implementation of circuit breakers. Recall that circuit breakers kicked in when an individual stock moved 10 percent or more in a five minute period; this triggered a five-minute halt. The problem: there have been numerous trading halts based on one or two erroneous trades. Last week, the NYSE modified this rule, requiring THREE trades outside the 10 percent band within the five minute period before the breaker will trigger. Nasdaq adopted this policy late last year.

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