While crashes may be started by humans, today’s market structure means mistakes are more likely to snowball rapidly, said Sal Arnuk, a partner at Themis Trading LLC and a frequent critic of the way markets have evolved.
“I would ask Mr. Berman, how can you explain or justify that a large-cap or very liquid stock, when there is a fat- finger trade, sees the market widen out as much as it does,” Arnuk said in a telephone interview. The current structure of markets “is set up to extract the most amount of pain from any mistake.”
A study published by Credit Suisse Group AG on Jan. 17 found that few sudden swings are directly attributable to computer errors.
Ana Avramovic, an analyst at Credit Suisse Trading Strategy, examined mandatory halts prompted by volatility in individual stocks between June 2010 through December 2012. After excluding “extremely illiquid or cheap stocks,” she found that 85 percent were caused by news and 9 percent by human error.
Only 6% -- or 21 instances in 31 months -- were caused by a bad print, when a quote at an extreme price caused a halt, suggesting a computer algorithm was responsible.
Recent research from the University of Michigan explored another point of contention regarding high-frequency trading: whether investors generally benefit from the practice.
The report found that while a technique known as latency arbitrage -- in which traders exploit delays in sending market data among the 13 exchanges and about 40 alternative venues in the U.S. -- enriches some firms, overall market efficiency is harmed “with no countervailing benefit in liquidity or any other measured market performance characteristic.”
Berman said today that while the SEC continues to study computer trading, other measures should limit human mistakes. He highlighted the proposed Regulation Systems Compliance and Integrity, which seeks to limit technology breakdowns at venues handling stocks, options and bond trades and ensure they can withstand malfunctions that could jeopardize markets.
Another initiative, the market-access rule adopted in 2010, requires risk checks on any order sent for execution. The two together are a message to market participants and venues to improve, Berman said.
In remarks to the Sifma audience, Berman also questioned critics who suggest computers have made buying and selling stocks too fast for the good of the market. He said the SEC’s analysis will look at the speed of trades, and he will reserve judgment until it’s complete.
“I’m not sure why, absent other facts, it should be a concern that trading take place faster than a blink of an eye,” he said.