[clearf]

One of the authors here. I think that's a pretty good summary. And, yes, I agree that there are ways to introduce damping into many such systems and some has been added since the Crash, as another comment points out.

I think it would be great if the SEC believed that that was their mandate. Unfortunately, I think that is predicated on much more sophisticated and nuanced understand of the dynamics of the markets than regulators typically have.

The claim in the recent CFTC's Complaint that alleged market manipulator Navinder Sarao directly contributed to the crash is only one example of this. If one guy can cause a Flash Crash, there is a bigger problem with the structure of the markets.

[minimax]

I'm curious whether you have seen this speech from last year given by Gregg Berman who was, until recently, an associate director in the division of Trading and Markets at the SEC.

http://www.sec.gov/News/Speech/Detail/Speech/1370541505819

I think it shows that the regulators (at least some of them) do want to have a better understanding of the dynamics of the US equity market, and that they are trying to build the tooling that will give them the right sorts of insights. Berman's suggestion that policy changes ought to be driven by data are, I think, something that most technologists would agree with. For whatever it's worth, Berman also has a physics Ph.D. from Princeton. So if your insinuation is just that the regulators are more lawyer than scientist I don't think that's completely true.

edit: Also wanted to add that there has been a lot written about the flash crash and I think this article is definitely one of the better ones.

[clearf]

I have heard Gregg Berman speak, though I hadn't read this speech until skimming it just now. I do think that there is, generally speaking, a heartfelt desire to develop the tools and data needed to gain insights that Berman is talking about.

I think there are two challenges to unpack. One, though I wasn't insinuating it, I could have been. I do believe that regulators are more lawyers than physicists. Berman is the exception rather than the rule.

Two, Berman, in particular, makes a fundamental error that I think is very easy to make. There's a difference between "complex" in the sense that something has a lot of parts, and interactively complex in the sense that parts of a system are fundamentally unknowable and it can experience wild and unexpected dynamics. I think Berman doesn't distinguish between those two types of systems (repeated analogies to cell phones give some indication of his thinking), and more generally, regulators don't understand the aggregate cost of complexity.

In my view, things like Midas are orthogonal to some deeper issues facing the markets. Regulators have created a quasi-competitive market that breeds this sort of interactive complexity. Then, when something goes wrong, they rely on punishment and enforcement actions [1] to target individual firms that have made "mistakes." This not only does not address root causes, it creates a culture of silence around technology risk issues within firms and across the industry. I've written more about this here: http://harvardkennedyschoolreview.com/preventing-crashes-les...

[1] See, e.g., http://www.sec.gov/litigation/admin/2013/34-70694.pdf and http://www.sec.gov/litigation/admin/2013/34-69655.pdf