'Flash Crash' Safeguards Could Leave Some Small Investors in the Lurch

With more orders moving away from the floor, more electronic markets sprang up, with big Wall Street banks creating their own versions of ArcaEx and their own internal pools for electronic trading. At the same time, trading became more automated, driven by computer programs. Where once stock markets were controlled by a group of humans gathered in one centralized place, the NYSE, by the middle of the last decade there were numerous electronic markets and humans were largely made irrelevant by computers.

Mind the Gaps

When the flash crash occurred May 6, NYSE traders and other critics of market structure changes claimed that the rise of computerized, fragmented markets had come back to bite investors.

The NYSE's circuit breakers (known as liquidity replenishment points) were triggered, but other exchanges such as the Nasdaq didn't have them, which in turn caused orders to be rerouted there and to other exchanges that also did not have speed bumps.

Between automated trading and the lack of uniform market controls, certain stocks melted down.

Bringing a fast, fragmented market together with some uniform "go slow" safeguards in extreme conditions is at the heart of the circuit breaker pilot effort, the NYSE's Pellecchia said. "We'll learn from this pilot program and take necessary steps to improve," he said.

Dick Del Bello, senior partner at Conifer Group, a New York-base securities trading firm, said the pilot program is a good start, but eventually it will need to be expanded.

"If it's done across the board it will be effective," Del Bello said. "When there are gaps, they get filled. That some stocks are subject to time outs and others are not … that could lead to problems."

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