Using Regulation to Create a Reliable National Market System
System Logic was recently asked to submit an analysis to the House of Representatives Committee on Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises as part of their recent hearing titled “Equity Market Structure: A Review of SEC Regulation NMS.”
We’re no longer trading under the Buttonwood tree. In this analysis, we argue that complex systems, like electronic trading, cause and magnify errors due to unexpected interactions that are difficult to understand and stop in real time. Accordingly, the tools of regulatory examination and enforcement actions on which securities regulators ordinarily rely are not well suited to address errors that arise from complexity. Rather, reliance on enforcement actions inadvertently creates an environment that exacerbates the likelihood and severity of such errors, leading to a less robust and stable national market system.
Instead, our analysis suggests that securities regulators should consider the tools that increase systemic reliability in commercial aviation, such as anonymous self-reporting, industry-led reliability monitoring, and no-fault investigatory practices. The full memorandum can be found here and discusses each of these issues in turn.