Flash crash report sheds some light, but also disappoints
By Robert Sofia
Platinum Advisor Strategies
In a report released Friday, the Securities and Exchange Commission and the Commodity Futures Trading Commission said that a large investor – left unidentified – used automated trading software to sell futures contracts called E-minis at a time in the afternoon when the markets were already stressed, and that this action sparked the "flash crash" of May 6. The report indicates that this selloff in the futures market then spilled over into the market for individual stocks. As conditions worsened, the liquidity in the market dissolved because automated systems used by many firms paused when prices began falling severely. The ensuing plummet sent the Dow Jones industrial average down nearly 1,000 points, and briefly erased $1 trillion in market value. It was the largest one-day point drop on record.
The SEC-CFTC report detailed technical factors that led to the market turmoil, but it did not contain any specific policy recommendations that would prevent another flash crash from happening. The report has been submitted to a special advisory committee, which will eventually make recommendations to Congress related to market structure issues and incongruent trading rules across various markets.
Back in May, as an initial response to the crash, the SEC adopted a rule instituting a circuit-breaker “pilot” program for all exchanges to halt or slow down trades of a particular stock if the price moves 10% or more in a five-minute period. In September, the agency expanded the circuit-breaker program to all stocks of the Russell 1000 index as well as 344 specified ETFs. The SEC is expected to use the results of this new report to justify additional measures.
If you’re feeling ambitious, you can read the full 104 page report from the SEC.
Or you can check out the edited summary from MarketWatch.