Sat, Feb 25, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Threat of new ‘flash crash’ looms over markets – experts

Tuesday, June 22, 2010
Opalesque Industry Update – Just when the markets thought the May 6 “flash crash” was already history and its repeat very unlikely with the introduction of the new “circuit breaker” rule by the Securities and Exchange Commission (SEC), market experts said that the threat of a new crash looms large over Wall Street.

A good number of market traders and legislators agree that the May 6 incident, which saw the Dow Jones lose nearly 1,000 points in minutes, represents a larger problem symptomatic with high-frequency trading and lack of concrete policy to prevent future occurrences, reported CNBC.com.

Doug Roberts, chief investment strategist at Channel Capital Research, criticized the lack of global framework within the markets that deals in a global trading system. He said this makes the markets prone to flash crashes.

U.S. Senator Ted Kaufman warned of an imminent danger and added: “We are playing with dynamite here,” as he pressed for the SEC and Congress to address the flash crash problem.

Two “mini-flash crashes” recorded this month triggered fresh concerns. Last Wednesday (June 16), the Washington Post’s shares doubled inside of a second from nearly $460 to $929.18, while the tech services company Diebold saw its shares plunge 35% then recover in a period of a few minutes on June 2.

Regulators introduced reforms to prevent flash crashes
Early this month, the SEC introduced circuit breakers that would halt trading if an individual stock declines by 10% in five minutes.

In May, the SEC required national securities exchanges to provide regulators data so that they can aggregate real-time market information across multiple platforms.

These reforms were supported by industry experts in a roundtable discussion sponsored by the SEC this month. Market experts said the flash crash can be avoided with the introduction of structural reforms.

Confluence of events or not everybody was on the same page?
SEC Chairman Mary Schapiro announced on June 10 that their investigation into the May 6 flash crash had concluded that a confluence of factors had led to the unprecedented event. Although she said her agency would still dig deeper to find its real cause.

However, participants in the latest Opalesque Roundtable in Boston said the event was not caused by market manipulation or monopoly but because “not everybody was on the same page” that day. Alec Petro, Managing Partner at Bay Hill Capital Capital Management, a volatility-focused, multi-strategy hedge fund based in Massachusetts with $130m in AuM, said there was just too much data and very large liquidity that day. Also, “guys like us turned our machines off” that day (See Opalesque Exclusive: here) .

Digging into the May 6 ‘flash crash’
Initial investigations made by the Commodities Futures Trading Commission (CFTC) and the SEC showed that regulators were only “slightly closer to understanding the flash crash events of May 6.” In the 151-page report released 12 days after the event, both the SEC and the CFTC basically admitted that “their guess is as good as ours.”

Research firm Investment Technology Group Inc said that exchange traded funds (ETFs) were more affected by the flash crash that any other category of securities. Many blamed ETF failures on May 6 on either a problem in the U.S. market structure, or a problem with ETFs as a product (See Opalesque Exclusive: here) .

A report by Reuters cited a document from the Chicago Mercantile Exchange parent CME Group which pointed to wealth manager Waddell & Reed Financial Inc. as the alleged culprit of the May 6 market plunge. Waddell, which manages the $22.1bn Ivy Asset Strategy fund, was said to have sold a large order of e-mini contracts during the 20-minute span when the Dow Jones plunged that wiped out an estimated $1tln in market capital.

Original flash crash of 1962
According to an article published by Advancedtrading.com, the original flash crash occurred on May 28, 1962 when the Dow Jones Industrial fell 9% in less than 12 minutes. As in the case of this year’s market plunge, the SEC also launched an investigation into the 1962 event but came out with no clear explanation as to its cause.

One of the recommendations then was for “special provisions in respect to the handling of stop sell orders or market sell orders.” Similarly, last month, SEC Commissioner Elisse Walter has called for an examination of market orders. It seems the markets and regulators have not learned from past mistakes.
-Precy Dumlao

Bg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Legal - Fannie, Freddie shares dive after U.S. appeals court ruling[more]

    From Reuters.com: Shares of Fannie Mae and Freddie Mac tumbled more than 30 percent on Tuesday after a U.S. appeals court shut down efforts by hedge funds and other investors to pursue numerous legal claims accusing the U.S. government of seizing their profits following taxpayer bailouts. By a

  2. Institutional investors plan to raise allocations to alternative assets in 2017[more]

    Komfie Manalo, Opalesque Asia: A survey by Context Summits Miami showed that nearly 72% of institutional investors and family offices plan to raise their allocations to alternative asset managers this year, suggesting continued strong demand for the industry. "As many large, brand name f

  3. Comment - Mortgages, mergers and hedge fund fees, Fairholme's Berkowitz responds to court ruling against hedge fund suits of Fannie Mae[more]

    Mortgages, mergers and hedge fund fees From Bloomberg.com: Yesterday the U.S. Court of Appeals for the D.C. Circuit handed down an odd decision in a lawsuit over the government's nationalization of Fannie Mae and Freddie Mac. The key issue is what's called the "Third Amendment," the 2012

  4. Investing - Hedge funds continue to chase the herd in record Momentum wager, Marshall Wace bets grocer Sainsbury may need rights offering, Hedge fund net exposure has started to retreat, David Tepper's Appaloosa fund makes a huge buy, The 10,000-mile journey to Short Australia, Skeptical hedge fund investors grill Evan Spiegel about Snap's I.P.O.[more]

    Hedge funds continue to chase the herd in record Momentum wager From Bloomberg.com: Hedge funds can't get enough of momentum - even if it means embracing an investing strategy they hate. Loosely defined as betting on shares that went up the fastest over the preceding nine-to-12 months, h

  5. Opalesque Exclusive: Swiss investors take fund seeding and acceleration into their own hands[more]

    Benedicte Gravrand, Opalesque Geneva: Banque Bonhote, a 200-year old Swiss private bank, last year launched a community of investors - heads of Swiss family and advisory offices and wealth managers - with the aim of co-investing in the kind of managers they wanted to invest in, either by way of s