In the same week that New York Attorney General Eric Schneiderman announced a probe of high-frequency trading and collocation services that deliver the fastest trades possible, the president and COO of a major Wall Street firm weighed in on what his investment bank would support from regulators.
Writing in todays Wall Street Journal, Gary Cohn writes that [i]nnovation is critical to a healthy and competitive market structure, but not at the cost of introducing substantial risk.
Citing ideas and possible reforms from regulators and industry participants, including asset managers, broker-dealers, exchanges and trading firms, Cohn writes that he not only agrees with a number of their concerns but he propose the following four principles:
First, a wider safety net of controls.
We propose that all exchanges adopt a stringent set of uniform, SEC-mandated execution controls to reduce errors. In addition to limit-up, limit-down rules that prevent trades from occurring outside a specified price band, pre-trade price and volume limits should be implemented to block problematic orders from entering the market, Cohn writes.
Second, fine cancelled trade orders.
One idea would be to consider if regulatory fees applied on the basis of extreme message traffic-rather than executions alone-are appropriate and would enhance the underlying strength and resiliency of the system. Regulators in Canada and Australia have adopted this approach, writes Cohn.
Third, send public market data at the same time.
Stable and accurate market data is one of the most important elements of market safety; it is the backbone of the market that must weather the most extreme periods, he writes.
Fourth and finally, clearing members need more tools to limit risk.
Clearing firms use various tools like margin and capital adequacy to manage their risk, but exchanges should also provide uniform mechanisms for clearers to set credit limits and to revoke a client’s ability to trade immediately upon request, when necessary, concludes Cohn.
