Tuesday, May 11, 2010

The SEC Talks About Reforming Market Mechanisms

"In addition to time out mechanisms, we will consider any other steps that potentially could prevent or help minimize the harm that occurred on May 6. These include: (1) exchange-level erroneous order filters; (2) “collars” on the prices at which market orders or aggressively priced limit orders can be executed; (3) limitations on the size of market orders or aggressively priced limit orders; and (4) eliminating the practice of displaying stub quotes that were never intended to be executed."

So that's a total of 5 prospective improvements to be made, 4 of which I discussed here already. 0)Time out mechanism: NYSE's LRP already exists, 1) preventing aberrant trades before they happen, 2) individual stock trading curbs, 3) limit the size of market orders - to ZERO! 
I didn't discuss her point number 4:  "stub" orders, and I don't think that would make a difference.  If you do the other 4 things, "stub" orders become irrelevant.  By the way - a "stub" order is a boundary "place holder" type of quote, like a 1c bid, or a $999,999 offer.  Schapiro seems to think that if there was no 1c bid, then the 1c trades couldn't have taken place.  That may or may not be true, but again, will be made irrelevant if the other improvements are made.



Anonymous said...

As I see it, the value of a stub order at 1 penny is to be able to measure your round trip order latency in getting an order into the books in a way that doesn't tie up material capital.

While many of the congressmen have been foaming at the mouth and bloviating as if they are frequent Zero Hedge conspiracy theorists, at least all of the witnesses so far have been pretty good, and have explicitly mentioned stop loss orders... which I find encouraging.


EconomicDisconnect said...

Maybe they should have invited KD for another top level government meeting?

Kid Dynamite said...

gyc - clearly! or at least given me a hat tip!

i would take credit, but you don't have to really know your shit to know that these solutions were pretty obvious.

if they ban market orders, which they SHOULD, and don't give me credit though, i'll be annoyed ;-)... that's MY baby!


scharfy said...


If America wants to have to most liquid, transparent, and thus desirable capital markets in the world - How do you think the "stress test" of May 6 fared?

What letter grade would you give the markets as a whole?

Any final thoughts?

Kid Dynamite said...

ahhh. scharfy... very interesting question..

well, in "protecting the stupid", our markets got an F.

in "sensible immediate rebound from "irrational" levels", they get an A...

in "ultimate efficiency," i think they have to get an F, though, as efficient markets would dictate that would never exist...

still, i stick by my saying "the markets are not efficient, but they are efficient enough." i'm not sure how that jives with me giving them an "F" for efficiency - perhaps because it was only a moment of in-efficiency.