Flash Crash anniversary: What's different now?


The two year anniversary of the Flash Crash has come and gone, and despite a lot of chatter,  the same market structure essentially remains.

The battle-hardened positions have changed just as little. Both sides are as resolute as ever. Critics remain convinced that high-frequency trading is to blame for the mini-crash.

In the memorable words of Charlie Munger, "Take the rapid trading by the computer geniuses with the computer algorithms. Those people have all the social utility of a bunch of rats admitted to a granary."

He and other remains convinced that high-frequency trading is the root all market evil. I've suggested that the issues are perhaps a bit less cut and dried, and most would agree that there are different types of high-frequency traders, some of which are positive forces in terms of liquidity. What's become apparent lately is that whether you think they add value or not, they are less relevant now than before. Rightly or wrongly, retail investors are staying on the sidelines, and that means less volume for all.

Collectively, the masses have dealt a huge blow to high-frequency trading firms, who depend on retail-driven volume. That's been the biggest change between then and now. In terms of regulation, the most significant developments was the effort to ban flash quotes, which was successful on the surface, though some critics are convinced dark pools have come up with new ways to offer such quotes on the sly.

Another important--but hardly game-changing--development was the rise of enhanced circuit breakers and the coming price bands. Overall, the market structure debate has gotten a bit tired, though the issues remain significant. Reg NMS has come under criticism and remains a huge issue. But I really can't see any significant market structure shifts by the SEC this year. A move to ban maker-taker pricing would be really hard to pull off with uncertain benefits. Same goes for the much-discussed trade-at rule.

So for the foreseeable future, the market we have now is the one we're going to have to live with. -Jim