Can CSR Stand Up to "Fat-Finger" Freddie?

Most will remember the "flash crash" of May 6 in which the Dow plummeted 700 points and then - oops! -  the market didn't really mean it.  Swoosh - back up all is well again. According to the New York Times a dozen or more stocks have experienced what they call "mini-flashes." For example, the North Carolinian utility firm Progress Energy suffered a momentary share price drop of almost 90 percent of its value in a matter of seconds. Progress's CEO considered this to be 'a little disconcerting.' This has happened to more than a dozen other stocks. In some cases, these price fluctuations were attributed to a "software glitch." In other's it could have been "Fat-Finger" Freddie - suggesting a trader hit the wrong switch.   How can any form of integrated CSR reporting stand up next to value stripping techniques of high frequency trading (HFT)?

Some say these roller coaster rides are just the side-effects of our new techno-trading styles. Others, such as Professor James Angel of the McDonough School of Business at Georgetown University, feel we are seeing tremors of a disaster yet to come.

A form of circuit breakers were put into place after the May 6 crash to keep stock prices from free falling, Still, many feel more is required. Other proposals have emerged which call for financial transaction taxes, tagging the traders, higher margin requirements, or disallowing corporate interest payment deductions to discourage debt. Regulations may be sorely needed, but some blame the unintended consequences of regulations themselves for what they consider the new HFT arms race. An SEC ruling which allowed exchanges with quicker response times to move past exchanges with higher latency, in effect,  defined speed as the new trading strategy.

Economist Benjamin Friedman in a recent Daedalus article suggests that current attempts at financial regulatory reform are only dealing with the symptoms. Friedman believes there should be "significant probing of the more fundamental aspects of how well our financial system is serving us and at what cost." Per Friedman "No one seems to be relating the costly manifestations to the role the financial markets should play in our economy in the first place or asking how well the markets are performing that role."

Responding to Friedman's query in Bloomberg Business, Peter Coy suggests that rather than "patching up the current system" we need to "step back and consider the proper role of finance in the American economy." Coy believes that "finance is an erratic master" when it should rightfully be "a quiet, efficient servant."

Karim Taleb, the Principal of Robut Methods says "the case can certainly be made that the integrity of the exchanges has been compromised." CSR has to move beyond company and industry assessments and needs to have a stronger presence in dealing with systemic integrity.

Photo Credit: Alan Turkus