Waiting for the Sequel

Rob Daly, Sell-Side Technology

Tonight I plan to grab dinner with my brother and catch the first blockbuster of the summer, Thor. The amount of new and A-List talent associated with it looks to make it an enjoyable film and I'm sure Chris Hemsworth will be donning his winged helmet for several more films to come.

What does this have to do with the financial markets? Probably not much, except for the box-office contracts that trade on the Hollywood Exchange.

However, Hollywood does love sequels. If the first installment of a franchise makes megabucks, the studios will greenlight all sequels until the franchise becomes an unprofitable parody of the original film.

As we mark the first anniversary of the Flash Crash, one thing is certain: The market will see a sequel. Once an event has happened, it's almost impossible to prevent a reoccurrence.

All the mechanisms the regulators and markets have put in place address the symptoms rather than the underlying problem.

Whether they establish limit up/limit down trading bands, eliminate the stub quotes or implement pre-trade risk controls, it doesn't change who will feel the most pain when the markets tank.

In a pre-Regulation NMS world the market-makers were required to provide a fair and orderly market. In a post-Reg NMS world, it's every trader for themselves. If the market plummets and the large traders step away, there will be another flash crash.

I'm not calling for the re-introduction of market-maker responsibilities. That boat has already sailed and we will not see another one.

After the experience with Dodd–Frank, the US Securities and Exchange Commission (SEC) will not have the appetite to roll out Reg NMS II any time soon.


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