Anthony Malakian: Doomsday Scenario

If you were an investor, and you traded every possible day of the year, but you knew that all your earnings could be wiped out in a day—or even worse, in a matter of minutes—would you stay in the game?

The Flash Crash that roiled the market last May was a massive scare that has not helped people’s perceptions of high-frequency trading—which was one of the initial culprits suspected of triggering the market’s sudden drop. Yet, among many traders and technologists there seems to be a feeling that there was a lesson learned—one that won’t need to be taught again anytime soon.

But not everyone believes that. At the 2010 Waters USA conference, held in New York in early December, several hedge fund managers expressed concern that it’s not a question of if there will be another Flash Crash, but rather when and how soon it will occur. 

What I found most surprising at the conference was not the fact that delegates felt that another intra-day crash is a certainty—a crash that won’t necessarily result in a similar same-day recovery—but how many firms said that they need to be leaders in the realm of regulations and not just followers.

Andrew Silverman, co-head of Morgan Stanley electronic trading in New York, and the event’s keynote speaker, said, “If we don’t regulate ourselves, regulators will regulate us.”

Technologists from Deutsche Asset Management, Garrett Asset Management, Shaffer Asset Management and others echoed Silverman’s prediction.

Stark Difference
As a journalist, I believe there is one clear difference between covering the buy side and covering the sell side: The buy side doesn’t much like talking about its proprietary technology, and tends not to play well with others.

That’s why I was so surprised to hear this call for unity—especially given the buy side’s endorsement of such a call. Maybe the buy side is finally starting to see what’s at stake? If the Flash Crash is repeated on, say, February 2, 2011—Groundhog Day—there is a good chance that large numbers of investors would collectively throw their hands up and say: “Enough!”

I enjoy attending such conferences—and I believe they are useful to the industry. You didn’t have look any further than the packed auditoriums throughout the entire day to gauge the level of this usefulness to delegates. I also like the idea of the industry being proactive and making changes for the good of the whole, rather than moaning about regulators and politicians who don’t or won’t consider the law of unintended consequences—even if those arguments do carry a certain validity.

I believe that now is the time for leaders—not La-Z-Boy quarterbacks. The “unintended consequences” argument has, by now, worn thin; it’s up to industry participants now to make their case.

If a group of influential buy-side firms were to come together as a unified voice, they would be heard. Otherwise, a TV news program running a segment on the dangers of high-frequency trading is likely to have more influence.

Big Shoes to Fill
Finally, stepping into another staff member’s shoes is never fun. While I am excited to take over this column, there is no denying that Stewart Eisenhart’s departure from Incisive Media after eight years has left a substantial void.

I feel a bit like Brian Griese taking the reins of the Denver Broncos after John Elway retired—or, for you soccer fans out there, Massimo Ambrosini taking the captain’s armband from Paolo Maldini at AC Milan. Hopefully this transition, though, will be less Griese–Elway and more Steve Young–Joe Montana or Roy Keane–Eric Cantona. Time will tell.