Fear Of The Unknown Persists In Flash Crash Legacy
06 Mai 2011 - 7:53PM
Dow Jones News
A year after the May 6 "flash crash," securities industry
officials and regulators agree another market calamity couldn't
unfold in the same way. But fears of other, unknown pitfalls
persist.
While exchanges have a raft of new rules to show for the work
that went into unwinding the mysterious plunge and more will come,
the web of trading venues now stretches further and regulations are
more complex than a year ago, when the flash crash revealed seams
in the U.S. trading system.
"It still echoes," said Peter Bottini, head of trading for the
online brokerage OptionsXpress Holdings (OXPS), which counts nearly
400,000 customer accounts.
The sudden gyration chopped 700 points from the Dow Jones
Industrial Average over the course of 20 minutes--temporarily
erasing nearly $1 trillion in equity values--and took regulators
five months to fully explain, though new rules were crafted within
weeks to fix the most glaring problems with the structure of U.S.
financial markets.
Stock prices no longer can range more than 10% in a five-minute
period without hitting a "circuit breaker" that prompts a time-out
in trading. Exchanges agreed to uniform guidelines on when to void
transactions made in error and firms no longer can lodge
placeholder orders that offer to buy securities at outlandish
prices such as one cent--producing some of the more embarrassing
moments of that afternoon a year ago.
"It's gone a very long way to prevent another flash crash," said
Chris Nagy, who oversees trading issues for TD Ameritrade Holdings
Corp. (AMTD), the Omaha-based brokerage with eight million retail
accounts.
A year later the U.S. stock market--ground zero in the flash
crash--is a quieter place. About 7.1 billion shares changed hands
last month, down from 9.8 billion in April 2010, as activity
tapered off after last May and stayed lower. A pullback in
institutional investing has given computer-driven firms fewer
transactions to trade against, reducing their slice of market
volume to 53%, according to estimates from research firm Tabb
Group, down from about 66% a year ago.
It's also a more fragmented and complex landscape. Two new stock
exchanges came online last fall and Credit Suisse (CS) introduced a
major new electronic trading platform. Regulations addressing the
flash crash alongside new rules for short-selling and risk controls
have pressed trading firms to keep compliant, with more potential
rulemaking seen around the role of the busiest electronic traders,
and further refinements of the circuit breaker system.
"We have a lot of other issues we want to continue to pursue to
bolster and fortify U.S. equity market structure," Securities and
Exchange Commission Chairman Mary Schapiro told reporters after a
congressional hearing this week.
Schapiro has indicated a key priority in the coming months will
be to finalize two proposals--a consolidated audit trail for orders
and executions across all markets and a system to allow the SEC to
track the activity of large traders. Both would give the regulator
real-time market data, allowing it to reconstruct market meltdowns
faster.
"Without a doubt the flash crash made a consolidated audit trail
relevant," Security Traders Association Chairman Joseph Cangemi
said. Regulators needed five months to construct a
microsecond-by-microsecond rehash of May 6, in part because they
had to gather data from dozens of trading venues.
But fears of another unforeseen meltdown persist, particularly
among companies who saw their shares wildly whipsawed in the flash
crash. "There is a continued heightened level of concern at the
issuer level," said Bob Greifeld, chief executive of Nasdaq OMX
Group Inc. (NDAQ), which outlined new guards for Nasdaq-listed
shares last June.
Warnings have also been sounded that flash crash fixes have not
been fully thought out. The SEC's push to evolve circuit-breakers
to a new system that will limit trading within a narrow price band
has drawn criticism from CME Group Inc. (CME), the world's biggest
futures market operator.
CME has warned that curbing trade in specific securities that
are components of major indexes could make those measures--and the
derivatives that are linked to index values--less reliable,
increasing uncertainty during turbulent moments.
"We believe there are important unintended consequences with
this approach," said CME's Chief Operating Officer Bryan Durkin,
speaking in Washington Thursday.
Scott O'Malia, a member of the Commodity Futures Trading
Commission and chairman of a group focused on market technology,
this week said that regulators and exchanges should think about
ways to coordinate practices across borders to guard against a
flash crash episode cascading internationally.
But with the immediate threat of a repeat flash crash largely
addressed, many in the securities industry hope regulators will now
return to some broader issues regarding the structure of the
markets.
NYSE Euronext (NYX) Executive Vice President Joseph Mecane said
there remain big picture issues for the equity markets that need to
be addressed, such as rules for so-called dark pools, or anonymous
trading venues. The SEC had proposed in late-2009 changes to rules
on dark pools, but these were pushed to the side last spring; also
on the shelf is a proposed ban on "flash" order types.
The role of electronic, liquidity-providing traders--heavily
relied upon to ensure other investors can buy or sell securities or
derivatives--is another outstanding matter that needs addressing,
said OptionsXpress' Bottini.
"We definitely need the regulators and the politicians to carve
out some new rules to deal with the new realities in the
marketplace," he said. "More than any of the issues with the flash
crash is the fragmented liquidity across venues and that still
exists right now."
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com
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