1. FIXatdl and the 2010 Flash Crash Robert Golan – DBmind Technologies Rick Labs - CL&B Capital Management, LLC (& FIXatdl Co-Chair) Please Note: This is our personal views which may not pertain to our Client’s Views or Opinions.

2. Outline  Introductions  Flash Crash – May 6 th, 2010.  FIXatdl – What is it?  A proposed solution  Future Directions  Summary  Q & A

3. Flash Crash References Nov 5th meeting Webcast http://www.capitolconnection.net/capcon/cftc/110510/CFT Cwebcast-live.htm# Preliminary report: http://www.cftc.gov/ucm/groups/public/@otherif/documen ts/ifdocs/opa-jointreport-sec-051810.pdf Follow up report http://www.cftc.gov/ucm/groups/public/@otherif/documen ts/ifdocs/staff-findings050610.pdf SEC http://www.sec.gov/spotlight/sec-cftcjointcommittee.shtml CFTC http://www.cftc.gov/About/CFTCCommittees/CFTC- SECJointAdvisoryCommittee/index.htm http://www.capitolconnection.net/capcon/cftc/110510/CFT Cwebcast-live.htm# http://www.cftc.gov/ucm/groups/public/@otherif/documen ts/ifdocs/opa-jointreport-sec-051810.pdf http://www.cftc.gov/ucm/groups/public/@otherif/documen ts/ifdocs/staff-findings050610.pdf http://www.sec.gov/spotlight/sec-cftcjointcommittee.shtml http://www.cftc.gov/About/CFTCCommittees/CFTC- SECJointAdvisoryCommittee/index.htm

4. Preliminary Report on May 18th  Table of Contents  I. INTRODUCTION.............................................................................................................1  II. EXECUTIVE SUMMARY..............................................................................................2  III. GENERAL MARKET CONTEXT............................................................................ 11  IV. PRELIMINARY FINDINGS....................................................................................... 17  A. Securities Markets..............................................................................................17  1. Broader Market Drop and Recovery................................................................. 17  2. Securities that Suffered Declines Disproportionate to the Broader Market..... 29  B. Futures Markets..................................................................................................59  1. Background....................................................................................................... 59  2. Role of Liquidity in Markets............................................................................. 63  3. Analysis of Large Traders................................................................................. 66  4. Preliminary Findings......................................................................................... 69  C. Clearance and Settlement................................................................................... 69  1. Securities Markets............................................................................................. 69  2. Futures Markets................................................................................................ 70  V. NEXT STEPS................................................................................................................... 72  A. Areas for Further Analysis................................................................................ 72  1. Securities Markets............................................................................................. 72  2. Futures Markets................................................................................................ 74  3. Coordinated Analysis........................................................................................ 74  B. Potential Regulatory Responses......................................................................... 75  1. Securities Markets............................................................................................. 75  2. Futures Markets................................................................................................ 79  APPENDIX A OVERVIEW OF THE SECURITIES MARKET STRUCTURE...A1  APPENDIX B OVERVIEW OF THE FUTURES MARKET STRUCTURE.........B1  APPENDIX C CROSS-MARKET CIRCUIT BREAKERS.........................................C-1  APPENDIX D FUTURES MARKET INFORMATION...............................................D-1

5. The Findings: September 30 th, 2010  Turbulent Day in the Market  EU Debt Crisis  @1pm: Liquidity Replenishment Points (LRP’s) activated more then usual.  @2:30 - VIX (up 22.5% and Dow down by 2.5%).  Buy Side Liquidity for the E-mini declined 55% ($6B to 2.65B) & SPY by 20%.  @2:32 – An Algo was used to sell 75,000 E-mini contracts worth $4.1B using only the Trading Volume parameter and disregarded the price or time parameter’s. This was executed in 20mins.  Other notable events happened but we want to focus on the Algo setup and execution.

6. FIXatdl Algo Trading Definition Language

7. Algo Parameter Settings … Note: Example Only – not a real – validating set of parameters.

8. If it’s this simple – what’s the catch  Central Governance  Compliance and Certification  Monitoring and Control  Implementation Guides & Education  Budget and $$$  Transparencies to the right levels without compromising the Algo’s Special Sauce.  Multi-Asset and Multi-Industry Standards Cooperation.  Versioning and Maintenance

10. Some of the Algo Players  Citadel Investment Group  Bloomberg  Credit Suisse  Deutsche Bank  Goldman Sachs  Barclays  Morgan Stanley  Susquehanna Investment Group  UBS  Etc.

11. Prime Service Providers Hedge Fund Mutual Fund Hedge Fund Exchange t Algorithmic Trading System Prime Service Provider Custom VWAP TWAP Sniper

12. Finally, Something New! Systemic Risk  Risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market. (Schwarcz, Steven 2008)  CAPM gone?

13. Bricks for the Tower of Babel "They are one people and have one language…”  Legal or Universal Entity Identifier  Product or Instrument Identifiers

14. LEIs are not that simple!  up to date for name, address, electronic address, legal entity type changes.  link parent, subsidiary and affiliate relationships (one LEI to all other links)  Link all persons who own or effectively control that entity  LEIs that own various interests in other entities in various cascades including interlocking  Every security ever issued by that particular LEI  Entities that are freestanding legally, but economically are virtually 100% just combinations and permutations of other legal entities, such as exchange traded funds  Derivative products (futures, options, etc.) built off large baskets of underlying securities  Mortgage pools  Mortgage pool tranche

15. CFTC/SEC searching for a Fun, New Toy  Algos that describe OTC derivatives  That are simple like tinkertoys

16. The Holy Grail  Calculation of Net Exposures  Real time, across entities?

17. The train has left the station! JOINT STUDY ON THE FEASIBILITY OF MANDATING ALGORITHMIC DESCRIPTIONS FOR DERIVATIVES April 7 th !

18. Who will set the standard? FIXatdl SM FIXml

19. Who will set the standard (2)  OWL Web Ontology Language

20. Who will set the standard (3)  Composing contracts: an adventure in financial engineering  Simon Peyton Jones, Jean-Marc Eber, Julian Seward. ICFP 2000.  Following three slides are from that presentation

21. Combinator library Denotational semantics Operational semantics

22. But what does it all mean?  We need an absolutely precise specification of what the combinators mean: their semantics  And we would like to do something useful with our (now precisely described) contracts  One very useful thing is to compute a contract’s value

23. Summary  A small set of built-in combinators: named and tamed  A user-extensible library defines the zoo of contracts  Compositional denotational semantics, leads directly to modular valuation algorithms  Risk Magazine Software Product of the Year Prize  Jean-Marc has started a company, LexiFi, to commercialise the ideas  Beats higher order logic hands down for party conversation Routine for us, radical stuff for financial engineers

24. What about FIXatdl?  Algorithmic descriptions of derivatives are really algo trades for EVERYONE: Equities FI Options Futures FX Cross Asset

25. Some other possible Solutions  Consolidated Order Book with Pre- Analytic FIXatdl enhancements.  CEP/FIXatdl Integration points for surveillance and monitoring.  Centralized Algo Compliance and Certification  Etc.

26. Wrap-up  Flash Crash – May 6 th, 2010.  FIXatdl – What is it?  A proposed solution  Future Directions  Summary  Q & A