The FIA on July 28 submitted a comment letter to the Commodity Futures Trading Commission and the Securities and Exchange Commission expressing its views on certain regulatory initiatives recommended by a joint advisory committee established by the two agencies in response to the market events of May 2010, also known as the “flash crash.”
In the letter, the FIA cautioned that using trading halts to compensate for temporary reductions in liquidity and recommended instead that regulators use “proven market mechanisms” that are less disruptive. These include the CME’s “stop spike” functionality and the Eurex “volatility interruption functionality as well as “price banding” mechanisms used at CME and NYSE Liffe.
The FIA letter also contained several recommendations regarding pre-trade risk controls and emphasized that the responsibility for risk mitigation should be shared among trading firms, executing brokers, clearing firms and exchanges. With respect to the regulation of market-making functions, the FIA recommended avoiding “overly prescriptive rules” and allowing each exchange to develop their own incentive structures to promote liquidity.