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SEC Finds No Evidence Cancellations Caused May 6 Crash

SEC Finds No Evidence Cancellations Caused May 6 Crash
The headquarters building of the U.S. Securities and Exchange Commission (SEC) stands in Washington, D.C. Photographer: Joshua Roberts/Bloomberg

U.S. regulators haven’t found evidence that traders tried to profit during the May 6 stock- market crash by overwhelming exchanges with orders, a Securities and Exchange Commission official said.

There is no indication thus far that “one or more parties flooded the market with quotes” to cause delays in exchange feeds that list stock prices, Gregg Berman, a senior adviser to the SEC’s trading and markets division, said today at a Washington meeting to discuss the May 6 plunge.

Berman’s comments were at odds with speculation by Nanex LLC, a market-data provider, which said high-frequency traders destabilized New York Stock Exchange trading by submitting and then canceling thousands of rapid-fire orders. Executives at Winnetka, Illinois-based Nanex have cast doubt on findings by the SEC and the Commodity Futures Trading Commission that sales of futures contracts by a single mutual-fund firm started a chain of selling that bled into stocks and exchange-traded funds.

The crash erased $862 billion from the value of equities in 20 minutes before stocks mostly recovered their losses by the end of the day.

Berman commented at a meeting of the SEC, CFTC and an advisory panel tasked with making recommendations to the regulators on how to prevent future crashes.

Better Access

Brooksley Born, a former CFTC chairman serving on the panel advising the agencies, said investor confidence has been eroded by concerns that high-frequency traders have better access to markets and information.

Born said she sees “major problems” with the level of order cancellations by high-frequency traders. She said she’s worried that some firms submit “fraudulent” quotes to get a sense of where asset prices are heading.

The events of May 6 prompted the SEC and CFTC to increase scrutiny of computer-driven trading in which market participants such as mutual and hedge funds employ algorithms provided by brokers to execute larger orders through series of smaller buy or sell requests. Algorithms are often designed to take into account the prices at which a trader wants to execute, volume in the security, historical data and market conditions.

Robert Cook, director of the SEC’s trading and markets unit, said regulators are examining how brokers and other firms create algorithms, how they test the computer programs and what information is disclosed to customers about how they work. An SEC task force began looking at algorithm use before the crash, and it is an area of “further inquiry,” Cook said.


Regulators are also examining whether a firm’s algorithm could “cascade,” causing executions to affect market prices in ways that trigger further action by the computerized-trading system, said Andrei Kirilenko, a senior economist at the CFTC.

“That is a very active area of inquiry,” he said.

Regulators should consider placing restrictions on algorithmic transactions and limiting how many contracts a single firm can trade, said CFTC Commissioner Bart Chilton. Permitting high-frequency traders to buy and sell 10 percent of a market 10 times in 10 seconds doesn’t seem to provide any benefit to financial markets, he said.

“It seems there is a good argument that this type of trading is, in essence, parasitical trading,” Chilton said. “Given what we saw on May 6th, appropriate limits on financial futures and robotic algos seems warranted.”

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