[By Larry Goldfarb]

When the IPO Investigation was reaching its zenith and Spitzer et al were empanelling Grand Juries, The SEC was concerned about what impact this might have on the industry. Bear Stearns was falling into an abyss, yet the SEC was nonplussed.  Even as the hotly debated issue of eliminatiing Glass Steagall was front page news, the SEC was leading the charge for repeal. Thus, it's not surprising to hear the recent communication that has come out of the Federal Reserve Bank of Chicago - for two years now, the Fed has been pushing the SEC to get serious about the dangers of superfast computer-driven trading.  Yet, only now is the SEC getting around to looking more closely at some of those issues.

SEC Critics - Their Take.   Critics of the SEC say the delay is part of a pattern of inaction in dealing with the fallout from high frequency trading ("HFT") and shows that the regulator doesn't yet fully appreciate how fears of machine-driven market meltdowns are driving investors away from U.S. markets. Even as the SEC gears up for Tuesday's meeting on software glitches and how best to tame rapid-fire trading - the SEC's 8th public forum on market structure issues over the past 2 years - their counterparts in foreign countries - e.g., Canada, Australia, Germany - are moving ahead with plans to introduce speed limits to safeguard markets from the machines.

One item up for discussion is whether regulators should require trading firms and exchanges to deploy a "kill switch" so that they can quickly shut down a runaway high-speed computer program. That was recommended by the Chicago Fed on 3/25/10 - one of 7 recommendations it made to the SEC in the 2010 letter.

The Chicago Fed said exchanges and other trading platforms should install more risk controls, even if it slowed down trading, including a "kill switch" at the trader workstation level. "The competitive quest for greater and greater speed must be balanced with appropriate risk controls so that a clearly erroneous trade does not destabilize markets by precipitating a cascade of other trades in response," the Chicago Fed's then Financial Markets Group SVP David Marshall said in the submission.

Less than 2 months later, the Dow Jones Industrials would plunge 700 points in a matter of seconds. The Flash Crash of May 6, 2010 sparked a national debate over the merits of stock trading that takes place in fractions of a second, but it only led to modest action from the regulators.

But U.S. securities regulators, while noting that HFT has brought down trading costs for many investors by pumping more liquidity into the system, do not seem to be operating under any sense of urgency. "We are into a space now where there aren't any massive changes to be made," said Daniel Gallagher, the newest and a Republican SEC Commissioner who previously worked in the agency's Trading and Markets Division. "There are fine-tuning and dials." 

For more information, see [Reuters, 1/10/12]