The market events of May 6th were serious and significant, and I’m pleased that this Advisory Committee has been established.
As I listen to staff describe equity and derivative markets and what was going on that day, it makes me think of Lieutenant Columbo from the television series. He would receive responses to his queries, say "good bye," and then often pause and ask yet another question with the preface, "And one more thing I’m trying to understand . . . ." And that "one more thing" was usually the kicker.
Well, there are many unanswered questions about May 6th. In fact, I still have many questions about the economic fiasco and why some of the specific market actions took place. Yes, Congress deregulated the banking industry and that cue led to free markets than ran so rampant that we saw wild hybrids being created. There were exotic mortgages and bets upon bets that bundled loans would fail. There were hundreds of trillions in dark trading that took place off the regulators’ radar, and there were new speculators with novel trading strategies. All of these keep us asking "and one more thing," trying to figure out how the economic mess was created, and–more importantly– how we make sure it doesn’t happen again.
As for the May 6th events specifically, at this time, we can’t say with real assurance that they won’t be repeated. It could happen again, despite some of the regulatory tweaks that are being put in place. We can and should harmonize fail safe systems that, in some cases, failed and weren’t so safe. We need these "deep breath" mechanisms–be they circuit breakers or stop logic–to become mandatory and harmonized.
We also need to better understand the role that financial trading technology played and continues to play in markets. Flash and algorithmic trading are part of these markets and we’d better understand them more.
But today, we don’t have all the answers. We can’t say that crude oil won’t reach $147.24 again, like it did in 2008.
The Senate’s passage of necessary regulatory reform goes a long way toward putting us on the right road, however, to getting needed safeguards in place.
This Advisory Committee will be helpful in looking at May 6th. It will also be of assistance in looking around the corner at emerging regulatory issues. That said, without financial regulatory reform, all of the negative market events over the last several years could be repeated.
We need more regulatory tools and we need the appropriations–the funding–to implement, surveil and enforce the new law. We need to see and be able to regulate the hundreds of trillions in over-the-counter trading. Banks need to get back to their original mission statements and make loans. If we do all this, I am certain that regulators can ensure efficient and effective markets that are devoid of fraud, abuse and manipulation.
And one more thing–and this is the most important: We need to ensure that markets work for consumers.
