On May 6, the stock market crashed and then rebounded in the space of five minutes, a technical glitch that pulled back the curtain on the level of automation and trading-by-computer in the financial system. It wasn’t just that the NYSE had been rigged to the benefit of the influential and the powerful, it was that even they can lose control of their creation. When the location of your servers relative to the NYSE servers matters more than due diligence about price to earnings ratio, we have a serious problem. And after a long dormancy period under Chris Cox and a series of other rubber-stampers, the SEC is finally taking a look at it.

Federal regulators are examining certain practices involving “quote stuffing,” where large numbers of rapid-fire stock orders are placed and canceled almost immediately, the chairwoman of the Securities and Exchange Commission, Mary L. Schapiro, said on Tuesday.

“The S.E.C. and other regulators are looking carefully at certain practices in this area to assess whether they violate existing rules against fraudulent or other improper behavior,” Ms. Schapiro said during a speech before the Economic Club of New York.

Regulators were also looking at quote stuffing in connection with the mysterious “flash crash” on May 6 when the Dow Jones industrial average dropped sharply before quickly recovering.

Ms. Schapiro appeared to broaden the already wide array of issues the S.E.C. was examining in the wake of the flash crash, including the fact that some firms regularly sent more than 90 buy or sell orders for every trade they ultimately made.

Already, the SEC installed a “circuit breaker” program, which immediately stops trading on a stock for five minutes if it falls within the previous five minutes by 10%. But they appear to be looking at a variety of additional solutions.

With characteristic cynicism, Zero Hedge described this speech as “Mary Schapiro’s Comments On Being Only 20 Years Behind The Market Structure Curve”. Tyler Durden adds that the market has a 5:1 high-frequency trading to retail stock trading ratio, which sounds almost unbelievable. I would have to be convinced that HFT has any utility whatsoever before killing it altogether. It’s not a stock market for human beings anymore.

In the real world, sadly, limits and parameters are probably the best we’re going to get. It’s good news, however, that Schapiro stated affirmatively that the flash crash May 6 was not an aberration. Maybe she’s reaching a breaking point.

David Dayen

David Dayen