Renewed volatility in the U.S. stock market raises a question: If a freak event like the 2010 “flash crash” occurred again, would regulators have a better view of what was happening than they did back then?

Not really. And therein lies a crucial challenge for the Securities and Exchange Commission.

Periodic market glitches show how far the speed and complexity of trading has outpaced regulators’ capacity to monitor it. Over the past decade and a half, the daily volume of trade-related electronic messages has increased dramatically -- by one estimate, 500-fold. Meanwhile, regulators still rely on an outdated patchwork of surveillance systems lacking even basic information, such as reliable time stamps and customer identification.

At best, these systems can show only a partial picture of what happened, months after the fact. One tech executive says it’s like using bicycles to catch Ferraris.

After the flash crash, the SEC proposed a solution: Record all the activity in the stock and options markets, and have the data available for analysis fast. This “consolidated audit trail” would let regulators analyze anomalies and shed light on the causes of puzzling bursts of volatility. Better understanding could lead to better system safeguards -- and more sensible policing of the markets.

The project is complex, but not mainly because it requires the processing of 58 billion records a day. The bigger problem is the number of different organizations with a stake in the outcome -- and the fact that nobody has taken charge.

David Fuller's view

Bloomberg’s Editorial Board has identified the problem but not the solution.  Outside regulators from the SEC or anywhere else will remain permanently behind in the learning curve, even if they employ a few people who have left the financial institutions. 

Financial regulation is unlikely to improve significantly unless a sufficient number of investment managers across the industry decide to work with each other and also with regulators, to create a level playing field.  I am not holding my breath because there is little precedent for such cooperation.

Note: for my comments on the bear trends for most stock markets, please listen to the Audios.