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Flash Crash Redux: The Commitee Is in Session!

Flash Crash Redux: will we ever find out what happened in the Flash Crash?

This Friday, the Committee set up to figure out what happened on May 6, 2010 will meet--for the first time in a long time.

It was set up in the wake of the Crash and given the august title of The Joint Advisory Committee on Emerging Regulatory Issues. It's called a "Joint Commitee" because it consists of the SEC and the CFTC.

On September 30, 2010, the staffs of the CFTC and the SEC issued a report to the Joint Advisory Committee with its findings.

However, the Joint Advisory Committee itself never issued a report. Why not? Not clear, but it might have something to do with the immense, unmanageable work load that Dodd/Frank placed on the SEC staff.

Or maybe the CFTC and the SEC just don't get along very well. Or that they are both afraid of coming to any conclusion that might implicate their own decision-making over the years (tap your screen if you think I'm getting warm).

Will they ever issue a report? As the anniversary of the May 6th Flash Crash approaches, both agencies will undoubtedly feel some political pressure to look like they are doing something. They may issue a report, but they will certainaly issue a series of additional rulemaking proposals based on the findings of the staff report.

So far, the big achievement has been the uniform circuit breakers, which halt trading on all venues for 5 minutes when an individual stock moves more than 10 percent in 5 minutes. However, there is widespread consensus that the Joint Committee will recommend new "limit up/limit down" rules to replace the circuit breakers, which would allow stocks to trade within a band (say, any where below 10 percent of the last price but not above or below it)—which is the way futures trade.

Two additional issues likely to be discussed:

1) A consolidated audit trail, which would enable the SEC to track trading activities;

2) more explicit obligations for market makers (they have already abolished "stub quotes" which allow market makers to fulfill minimal obligations by putting in bids of $0.01).

If they get ambitious (don't bet on it) they may even talk about regulatory oversight of dark pools.

The meeting will take place this Friday, from 9:30 AM to noon, and will be webcast on the CFTC website.

For those who would like to review the staff's report to the Joint Committee, here is the link.

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