May 18, 2010
Currently the investigation into the irregular events which unfolded across the U.S markets on May 6th is ongoing, without a definitive answer having been reached.
Although the investigation is ongoing the SEC has jumped to an "unnatural and preemptive" fix, related to circuit breakers without really knowing what in fact caused the problem. If these circuit breakers across different markets function differently, the liquidity drain on May 6th could have very well been caused by a pure coincidence of application of these different mechanisms in the markets as each market has in fact a different trading model all together. If the crash was caused by a faulty delivery of information or rather a delay of information across different trading platforms, then why should we have to consider slowing down trading to cause more backups and instill more panic rather then allow normal trading to wash out any anomalies.
In fact busting trades should be the only method under consideration here if indeed market mechanics fail. And who is to say whether the action in a certain security is a result of market delivery failure or an underlying technical/event driven event horizon type of moment. Company X which is heavily shorted running out of Capital has been approved by the FDA with a new miracle drug that cures all forms of cancer. The company has a 56% Short Interest in the stock. One can only imagine the magnitude of the short squeeze that could ensue in such a situation and the capital on the sidelines that would amass on top of the squeeze to generate an incredible rolling momentum. Margin calls would ensue and market orders would fly simultaneously. What would happen to those in need to cover when the stock is suspended at 10% unusual activity or those in need to get in. After the 5 minute timeout a quick evaluation of the stock would make Co X a prime takeover candidate for a pps of no less than 100,000..where the bid/ask spread would resume. Then What? The same scenario could be applied in the reverse. Who will reimburse the losing parties, the U.S government?
These choices that government agencies are making for market participants are uneducated to say the least Protection of investors cannot come at the cost of other investors or traders.
Already, the PDT: Pattern Day Trading Rule is excluding certain segments of traders from the markets, removing both knowledge and liquidity when/where it is needed most. The rule makes absolutely no sense from a market functionality point of view, yet it seems that the more the SEC is trying to protect the interests of investors the more it is derailing the proper functioning of the markets and the rights of market participants.