Father of Algorithmic Trading Seeks Speed Controls
November 29, 2012
All of these proposed solutions Peterffy opposes.
Instead, he calls for new layers of protection against erroneous trades. Peterffy notes that today there are various layers of protection for markets.
One set is the single-stock and market-wide circuit breakers put in place by the Securities and Exchange Commission after the flash crash of 2010.
A second would enforce the market access rule also passed by the SEC in 2011. Its goal was to manage risks in electronic trading when brokers allow their customers to send orders directly to exchanges, Peterffy notes.
“And the rule basically says that there must be pre-established risk limits of each broker-dealer and no order should be transmitted by the broker-dealer or any of his customers when risk limits are exceeded,” he adds.
But these layers of protections weren’t enough to prevent these recent market events, he concedes.
The market needs more layers of protection to ensure that bad orders don’t get through the system.
“To these two I would add another layer,” he explains.
“It would evaluate each order in terms of the resulting position as part of the pre-existing position and if such position could not be supported within the broker’s or its customer’s capital then the order would have to be rejected,” he told Traders Magazine. All these three layers would evaluate would operate on the broker’s side, according to Peterffy.
Peterffy says “that these software layers that I am proposing to protect the markets must be entirely independent of each other. They must be separately activated and may not contain conditions based on the status of another layer.”
All of them would operate at the broker’s side of a transaction, before orders are sent to market.
“In addition,” Peterffy says, “I would also like to see a safety layer implemented on the exchanges’ side. Exchanges have a more of less well defined description of what constitutes an erroneous trade. These definitions should be clarified and exchanges should program their systems to reject orders the execution of which would result in an erroneous trade.”
In September, NYSE Euronext, the Nasdaq Stock Market, BATS Global Markets and Direct Edge told the Securities and Exchange Commission they are prepared to set up limits on the amount of trading their members conduct in a given trading session and shut them down if they exceed pre-set peaks. The exchange-run controls would act as ‘kill switches’ on unusually high order or trade volume.
The regulators, he predicts, will have to adopt these extra protective layers of software, to avoid future technical disruptions, such as the Knight incident.
“Otherwise,” Peterffy says, “these kinds of things, these market events, will keep on happening.’’