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August 5, 2012

Please Tell the Regulators That There Was A Wall St Created Financial Crash & Industry Self-Regulation is a Failure

The Wall Street Journal just posted an interesting article on the Knight computer trading debacle from last week.  What will get a lot of attention is the reporting that the SEC held firm on post Flash Crash rules prohibiting most firms from cancelling trades.  Unsurprisingly, Knight wanted to cancel a bunch of them to cut its losses. 

However, the following reporting should get a lot of attention and is much more alarming:

“The capital loss and its impact are a bigger concern for regulators than the violent market nose dive and recovery on May 6, 2010, now known as the flash crash, experts say. This loss threatened the survival of a central player in the market. Regulators had believed sophisticated firms such as Knight had in place robust risk management systems to protect them from such extreme situations. But the ever-advancing speed of computerized trading has made managing those risks difficult.”

Unbelievable, but true:  too many regulators still think these firms have “robust” systems in place to test and reduce risk.  It is as if they not aware of the financial crisis in 2007-2009 which proved to unbiased, sane people not directly or indirectly on the payroll of the banks that the financial industry simply will not and cannot regulate itself or protect itself, never mind our financial system and economy.

In their zeal to defund the regulators to prevent the implementation of financial reform, Wall Street and its allies in Congress and elsewhere have also impaired the regulators’ ability to even modestly keep up with developments the financial industry.  This hurts our markets and everyone who depends on them, as well as the financial industry itself.  Wealth and confidence destroying events like the Flash Crash, BATS crash, Facebook crash, JP Morgan’s London Whale prop trading losses and the Knight disaster are going to continue.  Everyone should stop believing or pretending that Wall Street or the rest of the financial industry have “robust risk management systems to protect them[selves] from such … situations.”



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