Can the government prevent a near-disaster from happening again if it’s not sure what caused it in the first place?
That was the question confronting the Securities and Exchange Commission immediately after the “Flash Crash” of May 2010, when the Dow Jones Industrial Average lost and regained about 600 points in a matter of minutes.
“Without understanding what happened, we had to stop the event in its tracks,” said Gregg E. Berman, senior advisor to the director of the Division of Trading and Markets at the SEC.
Berman’s Jan. 30 address at the Columbus School of Law, titled “How the SEC is Responding to Increasingly Computerized Markets,” offered an overview of the moves the agency made in response to the Flash Crash, as well as to the new norm on Wall Street: high-speed computerized trading that holds the potential for occasionally veering out of control.
Since the lightning-fast meltdown and equally swift recovery of stock values nearly three years ago, the SEC has created a new Office of Analytics and Research. Among other things, the office is charged with producing new initiatives and regulations that will better respond to the inherent market volatility created by computerized trading.
Speaking for the second time at the Law School at the invitation of the Securities Law Program and the Securities Law Students Association, Berman said that a significant new failsafe—a “circuit breaker”—has now been introduced in the system of stock trading.
If the system detects more than a 10 percent spike or drop in the market within a five minute period, trading is automatically suspended until experts determine the cause of the violent fluctuation.
The circuit-breaker has been tripped roughly 300 times over the past three or four years, “And it’s taught us that the market tends to correct itself,” concluded Berman.
Nonetheless, the stock market remains vulnerable to the unforeseen glitches and vagaries of high-speed stock trading, and Berman, a former hedge fund manager and physicist by training, said it bears monitoring at all times.
“There are some who advise to let the spikes happen and see if they go down. If the market spike goes too far and the market needs to shut down, the circuit breaker is still there,” Berman said.
“Let the spike happen and see if it goes down. If the market needs to shut down, the circuit breaker is still there. We can put the brakes on and say the market must stop.”