For all of the media attention lavished on the May 6 Flash Crash, the world remains in the dark about what actually happened. But the attention of regulators and Wall Street participants has been laser-focused on this, and suspense is mounting about what the SEC intends to do. A report by the SEC and the CFTS is expected in September. It will be devoured by the industry. Whether it will reveal anything truly spellbinding remains to be seen. 

But we're getting some interesting hints as to the current regulatory thinking. The SEC has said it is undertaking "sweeps" of various broker-dealers to get a grip on the role that sponsored access providers might have played. Many brokerages offer high-frequency traders access to the markets, and some do so with very little in the way of pre-trade compliance and risk checks. Not too long ago, some offered so-called naked access, which has come to mean unfettered access to high-frequency trading facilities. 

This has been a huge issue for the past year. And the SEC has pledged action. The industry currently is awaiting news of specific rules governing risk management requirements from Market Access Rule 15c3-5. It seems obvious that the agency really wants to put an end to naked access by ensuring high-frequency broker-dealers do some degree of compliance and risk management before the orders are sent off. This pleases many broker-dealers who make a business in this market. At least one firm, FTEN, has filed for a patent on technologies that would help in this area. Lime Brokerage also senses opportunity in this area. 

Adding to the urgency is news that retail traders--the raison d'être of the SEC in some ways--were among those most burned in the Flash Crash. They might have suffered inordinately because many had "stop loss" market orders in place that were triggered by the drop. They sold at market prices and got burned, while in the view of some, the market makers beat a timely exit. This will likely be addressed in the report. And anything with strong perceived retail investor impact will be used as justification for action. 

We'll have to see what specifics are mandated. We've already seen single-stock circuit breakers put in place with various bands, and most assume that stub quotes will be addressed. It will be interesting to see how ETFs are dealt with, as they figured in the Flash Crash significantly. - Jim