A statement issued today by the Shadow Financial Regulatory Committee examines how events, such as the “Flash Crash” of 2010, and the administrative responses taken to cancel and/or correct these events can undermine the public’s confidence in the reliability and fairness of the markets and may adversely impact certainty regarding the validity of transactions. The statement is coauthored by Chester S. Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance at Carnegie Mellon University’s Tepper School of Business.
The statement affirms that a better approach in limiting future trading errors would be secured by “establishing an ex ante set of rules that would block a questionable trade before it occurs.” This approach would require for trading bands to be specified in advance and extended, where possible, across all trading platforms. Trading would be prevented occurring outside a band around a preference price, which during the trading day is the average price over the prior five minutes in time.
A PDF of the statement is available at: http://www.aei.org/files/2013/09/23/-statement-no-345-breaking-bad-trades_120303410396.pdf