Forbes Contributing Writer Chris Clearfield Argues That Regulations Create Risk in Complex Markets

In an article published in Forbes, System Logic principal Chris Clearfield advocates the simplification of market structure through less complex regulation and recommends that legislators move toward "a culture that encourages collective learning."

According to Mr. Clearfield, the Flash Crash should have compelled regulators to reconsider the structure of U.S. national markets and realize that a simpler set of rules would result in a market that was "more resistant to explosions of volatility." He explained that although news reporters and analysts have alleged recently that the manipulative activity of a single trader contributed to the Flash Crash, neither manipulative activity nor a large order should have been able to crash the markets. According to Mr. Clearfield, if one "reasonably small-time bad guy" can crash the market, then the problem "is not the bad guy, it's the market structure."

Instead, Mr. Clearfield argued, the Flash Crash's root causes stem from "layers of technology, interconnections between exchanges and brokers, complex order types that confound even sophisticated traders and exchanges themselves, and the burdens and requirements imposed by rules that continue to emerge from multiple independent regulatory groups."

To address these concerns, Mr. Clearfield suggested that regulators do two things:

• move toward the "radical simplification" of the U.S. market structure, beginning with a reexamination of the complexity that is created by Regulation NMS; and
• undertake investigatory responses to technical failures without resorting to enforcement actions, partly by providing firms with a mechanism for the confidential and anonymous sharing of information about technology glitches and near-misses. He explained that, currently, firms tend to suppress the lessons to be learned from such technological failures, which prevents the industry from finding solutions informed by the sharing of its collective experience.

According to Mr. Clearfield, unless regulators stop requiring excessive complexity in national markets, the number of destabilizing errors will increase.

See: "Chaos via Control: Regulations, Enforcement Create Risk in the Complex and Rigid Markets," by Chris Clearfield.Related news: Finance Professor Calls CFTC Allegations that Nav Sarao Caused Flash Crash "Outrageous" (with Lofchie Comment and Video Selection) (April 24, 2015); CFTC Publishes Appendix to Motion against Nav Sarao (with Lofchie Comment) (April 23, 2015); Article Casts Doubt on Significance and Causes of Flash Crash (April 23, 2015).