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Chaos via Control

Regulations, Enforcement Create Risk in the Complex and Rigid Markets

The Flash Crash should have been the impetus for serious reconsideration image_0of the structure of our national markets. But in the five years since its occurrence, assumptions have not been re-examined. The market’s complex and interconnected structure, which regulations mandate, increases the likelihood of destabilizing failures. Despite extensive study, and a recent indictment, regulators have not fully grasped the lessons of the Crash: a simpler set of rules would result in a market more resistant to explosions of volatility.

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Courting Catastrophic Failure

Will Managers Ever Learn?

From BP’s Deepwater Horizon disaster, to deadly component failures at image alt textToyota and GM, to technological meltdowns at major stock market participants likeKnight Capital (now KCG Holdings), Goldman Sachs, and NASDAQ, catastrophic failures have devastating effects on the environment, businesses, and customers. And the potential for failures of this kind is growing as both the complexity of our systems and the probability of extreme “trigger” events increase.

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Preventing Crashes

Lessons for the SEC from the Airline Industry

by Chris Clearfield, András Tilcsik, and Benjamin Berman
A small error on August 1, 2012 nearly bankrupted the Knight Capital Group. Code from a discontinued software component was accidentally reused after nine years, and in just 45 minutes Knight’s automated order router had flooded the market with millions of unintended orders. Knight lost $460 million when it sold back the inadvertently traded stocks—a staggering $10 million dollars per minute.
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