Edited by Geoffrey Poitras
Chapter 11: What Happened on 6 May 2010? Anatomy of the Flash Crash
Geoffrey Poitras [R]emarkably fast-growing IT-driven ECNs, MTFs, and other off-exchange trading facilities are giving rise to noticeable issues such as market fragmentation, regulatory discrepancies between markets and free-riding on the self-regulatory functions of incumbent exchanges in the EU and US. In the near future, this trend is also likely to affect Japanese stock markets. The ‘flash crash’ that occurred in the US in May 2010 is an example of a phenomenon arising from these factors. (Atsushi Saito, President and Chief Executive Officer, Tokyo Stock Exchange Group) Despite being a key element in capitalist society, much activity in the stock market happens outside the glare of public scrutiny. In turn, regulation of the stock market is predominantly civil, with criminal sanctions reserved only for the most egregious actions. In the US, the federal stock market regulator, the Securities and Exchange Commission (SEC), is only empowered to impose civil penalties. Criminal prosecution falls within the purview of the Justice Department. Similarly, important instances of historical regulation, such as the seventeenth-century Dutch ban on in blanco short selling or the eighteenth-century English ban on trading of privileges (see Poitras, Chapter 3 in this volume), did not involve criminal sanction. Rather, legislation removed the protection of the courts for those involved in such trading. Despite various bans and restrictions, ‘prohibited’ trading continued. Where sanctions associated with trading restrictions are particularly prohibitive, then trading shifts to alternative jurisdictions, for example hedge funds domiciled in overshore tax havens use a master–feeder fund structure to...
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