The extreme price fluctuations of May 6 Flash Crash trading chaos greatly affected everyone from individual investors to corporations that need to raise capital.
In response, the CFTC-SEC Joint Advisory Committee on Emerging Regulatory Issues issued a detailed report to the SEC and CFTC describing what happened on May 6 and making recommendations on reforms for preventing flash crash-like market disruptions.
Based on the investigations described in the report, the NYSE experienced record quotation traffic and significant delays in the dissemination of data on May 6. For more than five minutes starting at 2:44 p.m. in New York, its quotes in 1,665 securities were delayed by 5 to 20 seconds or more. Quotations in the same securities disseminated through its private feeds had an average delay of .008 second. As the result, 20-minute rout erased $862 billion from the value of U.S. shares, according to data compiled by Bloomberg.
The report stated that deliberate attempts by traders to overwhelm exchanges with orders played no role in the May 6 crash. The majority of activity that occurred on May 6 wasn’t quote stuffing, it was quote withdrawals. A report further stated that the plunge was triggered by the sale of futures contracts on the Chicago Mercantile Exchange that set off a chain of selling that bled into stocks and exchange-traded funds.
While the study said selling was worsened by automated firms trading with one another, the report placed no emphasis on the practice that has come to be known as quote stuffing, in which investors allegedly seek an advantage by delaying data feeds.
According to the report, no evidence was found that delays led to price declines since most high-frequency firms — the providers of the bulk of liquidity in the market — use private data feeds from exchanges instead of publicly available information. Regulators said the delays may have exacerbated concern about the accuracy of prices, encouraging liquidity providers to reduce their trading.
However, the evidence doesn’t support claims that delays triggered or otherwise caused the extreme volatility in security prices observed that day. The report further stated that NYSE was in the process of upgrading data systems on May 6. Less convincing are allegations about people intentionally trying to gum up the works without any evidence.
Some of the recommendations made in the report include the possibility of imposing price and volume limits for brokered trades. Require executing brokers to adopt certain trading practices when executing a large order by use of an algorithm, such as price or volume limits. Require executing brokers to have an obligation to monitor and make non-disruptive trading judgments.
Also, require executing brokers have similar limitations as exchanges, which is to have the maximum order-size limitations and price banding that prevent entry into the trading engine of an order that exceeds a predefined maximum quantity or a price difference from the current market.
Other options the panel considered are increasing visibility into the full order book and potential revisions to market pauses, either for single exchanges, such as stop loss functionality logic, or for cross-market circuit breakers.
Some experts say that although, it is not intentional, it is a big accidental problem that no one seems to be learning from or doing anything about. The quoting behavior has stopped and started again on different exchanges since May 6 and also occurred before then.
Some critics of U.S. market structure have urged exchanges to adopt a fee for quote cancellations that exceed a certain rate and said bids and offers should remain available to investors for a minimum amount of time. Such initiatives may curtail the ability of firms to submit and cancel orders rapidly.
