University of Houston Finance Professor Craig Pirrong voiced skepticism over the CFTC's proposed Regulation Automated Trading requirement that algorithmic traders provide the CFTC with source code information.
In a Streetwise Professor blog post titled "Where's the CFTC's Head AT?: Fools Rush in Where Angels Fear to Tread," Professor Pirrong opined that despite the CFTC's insistence on its ability to identify possible coding errors that could lead to "disruptive events," he doubts that the CFTC has the means to track down such errors or to improve system stability even if given access to the complete details of a given system. "[R]eviewing individual trading algorithms in isolation is of limited value in determining their potentially disruptive effects," he argued, since "individual algorithms are part of a complex system, in the technical/scientific meaning of the term." According to Professor Pirrong, the imprecision of the method can only yield arbitrary results:
Given this dimensionality and feedback-driven complexity, evaluating trading algorithms in isolation is a fool's errand. Stability depends on how the algorithms interact. You cannot determine the stability of an emergent order, or its vulnerability to disruption, by looking at the individual components.
"[E]ven in retrospect," Professor Pirrong stated, "it has proven impossible to establish definitively the chain of events that precipitated [the Flash Crash] and caused it to unfold the way that it did." Evaluating the stability of a system prospectively would be even more difficult, he added.
Professor Pirrong warned that regulators should be reluctant to undertake the task of "micromanag[ing] pieces of this complex system": "regulators frequently overestimate their competence, and financial regulators have proven time and again that they really don't understand that they are dealing with a complex system/emergent order that does not respond to their interventions in the way that they intend."
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