White Paper On What The SEC Will Likely Recommend In Response To The Flash Crash
Themis trading has submitted a white paper suggesting what the four distinct steps the SEC may take as a response to a sudden surge in complaints against pervasive and uncontrollable HFT market manipulation. These are as follows: i) Alter the existing single stock circuit breaker to include a limit up/down feature; ii) Eliminate stop-loss market orders; iii) Eliminate stub quotes and allow one-sided quotes (a stub quote is basically a place holder that a market maker uses in order to provide a two-sided quote), iv) Increase market maker requirements, including a minimal time for market makers to quote on the NBBO. We believe option 4 would be the most applicable, yet most retail investors will likely be most interested by the elimination of the traditional stop loss option that has become a staple in retail investing. Themis describes this possibility as follows: "Many investors that lost money on May 6th did so because they thought they were protecting themselves with stop-loss market orders. As the market melted down, these orders were activated and chased prices down a vicious spiral. These orders were not the cause of the Flash Crash per se, but they resulted in enormous damage to many unsuspecting traditional investors. The SEC has indicated that it may require market order “collars,” effectively converting market orders into limit orders." Schapiro is expected to release her list of recommendations shortly, and we are confident the entire HFT lobby is currently waiting patiently in her lobby to lavish her with untold riches which serve one function and one alone: convincing her that HFT does nothing but provide liquidity and collapse bid/ask spreads. The fact that it also collapses the market may be conveniently left out.
Full Themis Trading white paper (link).