Complete Text   I. Causes   II. Effects   III. Further Research   IV. Recommendations  
Nanex Flash Crash Summary Report 

IV. Recommendations

In our original flash crash report, we made 3 simple and straightforward recommendations. We've clarified and reduced them down to 2 (a rule banning quote stuffing is not required because the minimum quote life rule would effectively stop this practice):

  1. Replace the existing time stamp in consolidated quotation feeds with one generated immediately before that data becomes available to any system.

  2. Add a minimum quote life rule, whereby a quote must remain active until executed, improved, or a specific amount of time (50ms) elapses.

A minimum quote life rule has far less chance for unintended consequences, because as early as 5 years ago, it was essentially in force due to the limits of technology at that time. This chart shows a conservative estimate of the amount of quotes that would have been eliminated if the minimum quote life rule was 50ms. We believe the reduction in quote traffic from this rule would have prevented quote delays, making access to this data more fair to everyone.

Alternative Recommendations

Alternative 1:
Require  exchanges to route orders based on data from the Security Information Processor or SIP (e.g. CQS/CTS, UQDF/UTDF). This would level the playing field and provide a much better audit trail for determining if a trade received the best possible prices. Currently, each exchange essentially must recreate their own internal SIP in order to determine whether to route an order. The data from this internal SIP is not available (as far as we can tell) from any exchange. We created a video of an application we wrote that illustrates exchange routing and the separate internal SIP.
Alternative 2:
Ban exchanges from providing direct feeds that contain core quote and trade information. Current regulations (Reg NMS, rule 603(a)) prohibits direct exchange feeds from transmitting this core data to a vendor any sooner than it transmits the data to a Network processor (e.g. CQS).

Finally, we think a solution exists without new rules and regulations: if only the SEC would enforce, or at the very least provide guidance to, existing rules and regulations.



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