No Sign of Liquidity Bust in Biggest Stock Rout Since 2008

The worst stock decline since December 2008 was absorbed by the market and while some investors panicked, there were no signs liquidity was withdrawn as in the selloff of May 2010, traders said.

The Standard & Poor’s 500 Index retreated 6.7 percent to 1,119.46 at 4 p.m. in New York, closing at its lowest level of the day. The gauge slumped 11 percent in three days and fell to the lowest since September 2010. More than 30 stocks fell for each that rose on U.S. exchanges, the broadest selloff since Bloomberg began tracking the data in 2004. Almost 18 billion shares changed hands, the fifth-highest volume since mid-2008, according to data compiled by Bloomberg.

“The decline has been somewhat orderly,” said Mark Turner, head of U.S. sales trading at Instinet Group Inc. in New York, in a telephone interview. Instinet handles about 5 percent of the total daily U.S. equity trading volume.

“I don’t think we’re seeing any liquidity issues today, whereas the flash crash was something completely different,” Turner said. “We saw program trading taking over and the collapse of the market for a lack of bids. I don’t see that happening today.”

Credit Downgrade

The S&P 500 lost more than 4.7 percent for the second time in three days as the downgrade of the U.S. government’s credit rating on Aug. 5 added to concern that the world’s biggest economy is headed for a recession. A gauge of financial companies in the S&P 500 lost 10 percent.

“The market structure is handling trading quite well considering the volatility and volume,” Joseph Cangemi, managing director for global electronic trading at brokerage ConvergEx Group in New York, said in a telephone interview. “We’re in a period of uncertainty and uncertainty causes stress on the system and market. It’s a direct reflection of the economic uncertainty we’re all facing.”

More than $860 billion of equity value was wiped out in 20 minutes on May 6, 2010, as market makers and other liquidity providers withdrew bids to purchase stocks, according to a report by the Securities and Exchange Commission and Commodity Futures Trading Commission on Sept. 30. The Dow Jones Industrial Average fell almost 1,000 points before paring the decline.

‘More Orderly’

“The selloff has been more orderly than in the flash crash or the events of 2008, but the events of 2008 are probably an apples-and-oranges comparison,” Brett Mock, a San Francisco-based managing director at BTIG LLC, said in a telephone interview. Regulations to curb short selling and other rules to harmonize trading across venues worked, he said.

“It’s still a rough tape for everybody,” Mock said. “The markets are fairly orderly if extreme in their movements. It doesn’t feel like a disorderly selloff with a panic-stricken move. People are taking risk off the tape and the market is re-pricing events going on in the world.”

Short-sale rules that went into effect Feb. 28 triggered circuit breakers about 2,700 times today, according to data compiled by Bloomberg. The curbs, which began Feb. 28, limit bearish bets the day they’re triggered and the next, requiring traders to execute orders at prices higher than the best available bid.

Circuit Breakers

Circuit breakers for stocks in the S&P 500 and Russell 1000 Index and almost 350 exchange-traded funds, introduced after the so-called flash crash, were extended today to all exchange-listed securities excluding options.

While the current curbs halt trading when shares decline 10 percent within 5 minutes, 30 percent plunges trigger the circuit breakers for securities $1 or higher that weren’t previously covered by the restriction. Stocks less than $1 trigger the curbs when they drop 50 percent in 5 minutes.

Last year’s disruption led to additional curbs to safeguard markets. Exchanges now require market makers to supply bids and offers within 8 percent of a stock’s prevailing price for the biggest companies during most of the trading day. Last year’s slump was exacerbated by shares of companies such as Accenture Plc plunging to pennies.

Exchanges canceled trades on May 6, 2010, that were 60 percent or more away from their price at 2:40 p.m. in New York, when the sell-off intensified. Transactions in 326 securities, 70 percent of which were ETFs, were broken, regulators said.

‘Blew Out’

“During the flash crash spreads just blew out and things traded at crazy prices, which wasn’t the case today,” said Etai Friedman, head derivatives trader at MKM Partners LP in Stamford, Connecticut. “Spreads have not widened significantly. There hasn’t been a major liquidity event today.”

The rout that erased about $780 billion from U.S. share values Aug. 5 also reflected orderly selling by institutional investors, unlike the crash of May 2010, traders said. The S&P 500 fell 4.8 percent to an eight-month low Aug. 5, the biggest drop since February 2009.

“It’s not like other times when we’ve seen very, very huge, sudden spikes in message traffic or volumes,” said Joseph Mecane, executive vice president and co-head of U.S. listings at NYSE Euronext, operator of the New York Stock Exchange, on Aug.

5. “It’s much more orderly with activity that’s more spread out.”

Equity derivatives suggest a level of concern similar to March 2009, when the S&P 500 fell to a 12 year low. The VIX, as the Chicago Board Options Exchange Volatility Index is known, advanced 31 percent to 42.04 today after reaching 46.90, the highest since March 2009.

“It doesn’t look like a flash crash to me,” said Alec Levine, an equity derivatives strategist Newedge Group SA in New York. “It just looks like a global re-pricing of risk assets. You are having waves of forced selling, i.e. margin calls, into a market that is in the midst of a liquidity vacuum.”

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