That's not a new worry, either. In an interview in November 1989, Phelan told me he was very concerned about "self-front running" where firms engaged in index arbitrage trade ahead of imminent trades for customers.
We can save taxpayers the expense of the inevitable studies. There's a good one that already lays out many of the same automated trading problems we're experiencing today, and it was published in 1990.
The independent Office of Technology Assessment, which was subsequently done away with by Republicans looking for budget cuts, published a 200-page report that outlined the public's anxiety over volatility, market fraud and manipulation, and the increasing odds of a derivatives-related crash that could put the financial system at risk.
The OTA report also detailed how ridiculous -- my word -- it is to have a Securities and Exchange Commission and a Commodity Futures Trading Commission in charge of different aspects of the derivatives market. A divided regulatory structure can hinder enforcement efforts, the report said, describing relations between the two agencies as ranging "from cordial cooperation to polite teeth-gritting."Before anyone draws the conclusion that it's time to return to the good old days of specialists on an exchange floor, let's be clear that the specialist system wasn't exactly breeding altar boys. The SEC and NYSE brought enforcement actions against five specialist firms that paid $241 million in penalties and disgorgement in 2004 for executing orders for their own accounts ahead of the public. At least there were actual people to fine or bar from the industry in that case. With computers making more and more trading decisions, the inevitable brokerage firm cop-out will be to dismiss the madness that computers cause as the by-product of a glitch that couldn't be helped. Smart regulators, if only we had some, will be ready with punishments to make humans accountable when their machines wreak havoc in the markets. Susan Antilla is a freelance financial writer and columnist at Bloomberg View. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.