Speed, Safety & Stocks
May 4, 2012
It's one day after the anniversary of the May 6, 2010, Flash Crash. That, of course, is the day that the Dow Jones Industrial Average went down nearly a thousand points. That included a plunge of about 600 points in a matter of minutes, followed by a nearly equal snapback in a similarly short period.
The Securities and Exchange Commission and Commodity Futures Trading Commission weighed in about six months afterward with an analysis tied to the initiation of a selling program by "a large fundamental trader," aka a mutual fund complex. This was an effort to sell 75,000 E-mini contracts as a hedge to an existing equity position. These were stock market index futures contract traded on the Chicago Mercantile Exchange's Globex electronic venue.
But the reverberations were felt on the New York Stock Exchange and other major stock markets. It's seen in a continued decline in average daily stock market trading volume. On May 5, 2010, the NYSE handled trades involving 2.5 billion of shares listed on its exchange. A year later, that was down to 1.7 billion. By the end of March 2012, its average daily volume in NYSE-listed shares was at 1.4 billion - and overall, the NYSE was reporting a 24% dropoff in its share of all forms of U.S. stock trading.
The outlook on domestic equity funds has been no brighter. Since 2007, $500 billion has been pulled out of such funds by individuals and institutions, according to Investment Company Institute statistics. Of that, $260 billion has been pulled in the last two years, after the Flash Crash.There's no sign of let up. Nearly $9 billion was pulled in the week ended April 18.
The Dodd-Frank Wall Street Reform Act was passed in July 2010. The rules are still being created. Circuit breakers and other actions taken by the SEC seem to have prevented a recurrence.
But no regulator has yet come to grips with the systemic risk of the superspeed of electronification of markets. Indeed, on April 24, 2012, a single high frequency trader issued 47,138 quotes in a single second for a single stock. One that is not actively traded, according to Nanex.net.
By comparison, during the height of the May 6, 2010, Flash Crash, "the highest number of quotes in any one second for all Nasdaq stocks was 78,000,'' Nanex said. The challenge remains to rebuild confidence among investors, both small and large, that trading in stocks is essential. And safe.