New York: A "mismatch of liquidity," selling in futures and exchange-traded funds that fed into stocks and the use of market orders turned an orderly decline into a rout on May 6, a report by federal regulators said.
The Securities and Exchange Commission and the Commodity Futures Trading Commission said in a joint report on Monday that they found no evidence that mistaken orders, terrorism or computer sabotage led the drop, which briefly sent the Dow Jones Industrial Average down 998.5 points. The SEC earlier proposed rules to halt trading in individual shares that swing more than 10 per cent within 5 minutes to keep the selloff from recurring.
While the study stops short of assigning blame, its findings support a conclusion that conflicting rules on as many as 50 US market centres fuelled a chain reaction of selling that helped erase $1 trillion (Dh3.67 trillion) in stock value.
Regulators are still investigating the plunge, which spurred congressional hearings and the issuance of subpoenas last week.
"In the US securities market structure, many different trading venues, including multiple exchanges, alternative trading systems and broker-dealers all trade the same stocks simultaneously," the report said. "Disparate practices potentially could have hampered linkages among some of these trading venues and led to fragmented trading."
1987 crash
The breakdown highlighted how trading in US markets has changed in the past quarter century. During the 1987 crash, most trading in US stocks was handled by humans and the NYSE was dominated by firms that conducted share auctions to match buyers and sellers. Now, automated computer strategies that seek executions in less than a millisecond account for 60 per cent of trading volume on all markets, according to Tabb Group LLC, a New York-based research firm.
The Dow average fell as much as 9.2 per cent on May 6, its biggest tumble since the crash of 1987, before closing down 3.2 per cent.
Proposed rules
The Securities and Exchange Commission filed proposed rules under which exchanges would halt trading in individual stocks that swing more than 10 per cent.
The circuit breakers, proposed jointly with the Financial Industry Regulatory Authority, would be triggered in all markets by gains or declines over five minutes in Standard & Poor's 500 Index companies, according to an e-mailed statement. During the pilot programme that goes until December 10, the agency will also examine risks to investors created by market orders, and consider steps to deter stub quotes.
The proposed rules are subject to SEC approval after a 10- day public-comment period. Regulators plan to consider expanding the circuit breakers beyond S&P 500 stocks, including to exchange-traded funds. The agency will also improve rules for erroneous trades and communication protocols between market centres.
Rules to slow trading on the New York Stock Exchange drove orders to other platforms that swamped demand on May 6.
— Bloomberg
