As a shock collar needed to control the Frankenstein of automatic trading, the concept of an all-markets trading “kill switch” is something that takes free markets further and further from their original intent of free-flowing, unencumbered capitalism.
The kill switch advanced another square on the playing board yesterday, as SEC Chair Mary Jo White met privately with top executives of the major exchanges.
Five “reforms” were announced from that meeting. The group went to special lengths to say this action was not as a result of the August 22 trading halt on the NASDAQ, saying “We didn’t focus on any one day’s event,” it was obvious that the three-hour stoppage was fresh in their minds. The August 22 outage was caused by a software bug that bottlenecked, then clogged the processing of quotes from 13 major exchanges across the country.
Of course, the above incident was not the only one. In August 2012, Knight Capital nearly detonated itself after a software glitch led to a trading loss of $440 Million.
From that event, the topic of a “kill switch” came up at an SEC roundtable in October. Surprisingly (or maybe not surprisingly), exchanges liked the idea of wiring a kill switch into their control rooms, so any damage resulting from a platform-wide error could be contained, and not loosed upon the broader marketplace.
Here’s the problem: the very notion of a kill switch to stop trading is contrary to the bedrock principles of the market. Instead of unwinding some of the “hands-free” technology that operates so fast, it’s down to how fast electrons can fall at the atomic level–which IS the “Frankenstein”– they are just building “Bride of Frankenstein,” piling on more uncertainty as to when, how and by whom this so-called kill switch would be tripped.
The big daddies of the exchange industry were sent away from the SEC meeting with their homework assignments: come up with a plan to establish testing and disclosure protocols on system chances for the Securities Information Processors they deal with. Also, develop a plan to address how regulatory halts are communicated. Review current rules for “busting” trades, and re-opening trading after a halt. Assignment due in 60 days. Class dismissed.
On the need for a kill switch, one active trader in Chicago told Capitalist Union “High frequency trading distorts the market. The program-trading platforms work on the nanosecond level, and jump in front of the real orders to try and make a penny or two– millions of times a day. They feed off of real orders until there are no real orders left to feed off of. We’re seeing this now, as volume disappears. It all needs to slow down.
SEC Commissioner Luis Aguilar, a Democrat, said he is “happy” to see a kill switch is being considered, saying “These market interruptions are unacceptable. It is long past the time for the SEC to take action.”
The Capitalist Perspective
Those “panic” sells and buys are part of the charts; they’re part of the history of trading. Those orders are the reality of as-it-happens information. To step in the middle of that with a government-encouraged kill switch means you’re frauding the trading history.
In some of those panics comes opportunities that would otherwise never be there; for its in those panics that fortunes are made and lost. However that works, it’s part of the entire system, and you cannot control perception of information without controlling the information, itself, thus the results of how that information is taken.
You might as well shut the whole marketplace down and just sell bonds in companies rather than stock. Scrap the whole idea of a stock market and private investor money in public companies if you’re only going to allow it to go one way, often for a select group of connected parties (both figuratively and literally speaking).
Your Comments
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