The Catholic University of America

 

 



L-R: Professor David Lipton, director, Catholic University's Securities Law Program; James A. Brigagliano, partner, Sidley Austin LLP, former deputy director, SEC Division of Trading and Markets; Theodore R. Lazo, 1994, managing director and associate general counsel, SIFMA; Vaishali Javeri, director and counsel, Credit Suisse; Christopher R. Concannon, 1994, executive vice president, Virtu Financial LLC, former executive vice president, NASDAQ; and George E. Garvey, acting dean and professor of law, Catholic University's Columbus School of Law.
 

Experts Address the Computer-Driven Volatility of the Stock Market

 

What can make billions of dollars worth of stock virtually disappear from the stock market in a matter of minutes like a David Blaine feat of televised magic? A computer glitch can pull off the trick before your very eyes.

It happened in May 2010, when the infamous “flash crash” was set off by a single errant large trade estimated at $4.1 billion in the S&P 500 E-Mini Futures Market. The cascade led to 20 minutes of extreme volatility, wiping out nearly $1 trillion of market cap before inexplicably recovering.

Forensic market analysis afterward focused on the pitfalls inherent in the widespread use of warp-speed securities trading, driven by powerful computer algorithms designed to make very small profits on each of millions of daily trades.

Some of the best minds in the securities field came together on Oct. 3 to discuss “High Frequency Trading: Why is it done? What are its dangers? How can we protect our markets?” The panel program was sponsored by the CUA Securities Law Program Speakers Series in New York City.

Speakers included James A. Brigagliano, partner, Sidley Austin LLP and former deputy director, SEC Division of Trading and Markets; Christopher R. Concannon, a 1994 graduate of the Columbus School of Law and executive vice president, Virtu Financial LLC and former executive vice president, NASDAQ; Vaishali Javeri, director and counsel, Credit Suisse; and Theodore R. Lazo, a 1994 graduate of the Columbus School of Law and managing director and associate general counsel, SIFMA.

Most of the speakers had previously addressed the dangers associated with high-speed securities trading in other venues. But since the “Flash Crash,” other warning events have occurred.  

  • We have learned that "Mini flash crashes" occur on a near-daily basis in individual stocks. There have been almost 2,000 documented instances of individual irregularities in stocks in the past 15 months.
  • Facebook’s much ballyhooed IPO stumbled badly due to technological "glitches," continuing to sour the already soft market for IPOs.
  • On July 31, Knight Capital Group, an official Designated Market Maker on the NYSE, had a “software glitch” according to their CEO. The result was a loss estimated at $440 million and further erosion in investor confidence.

Nonetheless, high-speed trading now accounts for between 50% and 70% of equity market volume on any given day, nearly unregulated activity. 

“Computerized trading is here to stay, but it needs further regulation" said Catholic University law school Professor David Lipton, director of the Securities Law Program and the moderator of the afternoon symposium. Lipton went on to say that "most of the securities market regulations adopted in the past eight decades have focused either on disclosure or fairness. Computerized, algorithmic trading requires a new focus, very much centered on operations." 

The panelists agreed that improved safeguards and warning systems are required against the vagaries of computer malfunctions in high-speed, high-volume securities trades. The symposium was was hosted by Covington & Burling at its office on Eighth Avenue in New York.