Unintended Consequences in Financial Regulation

As I am a great fan of Walter’s book on legal education (subscription required, alas), I am very excited to be co-guest blogging with James Maxienier.


Unlike Walter or James, I am not an academic.  My background is as a lawyer in financial services, first as a regulator and in-house, and now in private practice. In my spare time I’m editor of an online book review, the University Bookman, which covers law and other subjects.


The financial system is an exceedingly complex set of relationships and legal obligations. It is also very highly regulated – some op-eds to the contrary – but sometimes so highly regulated that unintended consequences sometimes trumps the regulatory scheme. A recent example:  Knight, a brokerage firm recently caught, through apparent computer programing errors, with a loss of over $400 million earlier this month.  But the error may have been exacerbated by rules enacted in the wake of the last computer programming error, the so-called “flash crash” in 2010.  As reported in the Wall Street Journal

“Desperate to keep the company afloat, Knight Capital CEO Thomas Joyce spoke with SEC Chairman Mary Schapiro Wednesday about having its erroneous trades cancelled. Citing SEC rules, Schapiro effectively turned him down, according to a person familiar with the agency.”

This week I hope to explore some of examples of regulation – in the financial services area primarily, but not exclusively – where the rules don’t seem to work as intended, as well as anything else I think you may find of interest.



  • Gerald, my reading on Knight indicates that the loss was a bit more than $400,000,000. Is your figure of ten times that a typo or am I mistaken?


  • Fixed, thanks Bob!