Regulators may never pinpoint cause of market crash
U.S. regulators may never know what caused the recent market crash and still have not found evidence trading errors or system malfunctions triggered the brief free fall, top futures markets regulators said on Monday.
More than two weeks after the Dow Jones Industrial average lost nearly 700 points in minutes before recovering, regulators and exchange operators are still searching for answers.
I think that's possible that we may never know what happened on May 6, Jill Sommers, a commissioner with the Commodity Futures Trading Commission, told Reuters.
The CFTC and fellow market regulator the Securities and Exchange Commission have been forced to set aside long-standing differences over jurisdiction.
For more than a year their respective chairmen have worked together on new derivatives rules and were thrust back into the spotlight after the market crash. SEC and CFTC commissioners met on Monday for the third time since the CFTC was created in the 1970s.
CFTC Commissioner Michael Dunn also said in an interview that it's going to be difficult for us to understand totally what happened, adding it was likely several factors were responsible for the market swing.
A CFTC official told a panel exploring the crash the initial findings showed the flash crash was not so much the cause of a single event, but a confluence of events that led to the dislocation in liquidity.
The regulators have been analyzing the events, including links between declines in the prices of stock index products such as E-mini S&P futures contracts and the role so-called stub quotes played in the market crash.
Panel member Susan Phillips, dean at the George Washington University School of Business, asked what the purpose was for the quotes. The stub quotes act as a place holder for market makers when they do not have enough liquidity available to trade a stock near its recent price range.
Many of the trades that were canceled after the May 6 plunge are tied to stub quotes, which can often be as low as a penny. In some cases, many venues do not need a market maker, leading some firms to jump in to act as one, an SEC official said.
The SEC's director of trading and markets Robert Cook added that changing or even eliminating the use of stub quotes could lead to changes in market orders.
Regulators and the major exchange operators are expected to soon create a circuit breaker or mechanism that would pause trading in a individual stock if the stock was in free fall. They are still working on updating existing circuit breakers that would apply across equity and futures markets. Those trading restrictions were not triggered during the brief market crash earlier in May.
The SEC will meet on Wednesday to propose rule to improve market surveillance. Currently the dozens of market venues are supervised by exchanges and market regulators such as the SEC, CFTC and broker dealer watchdog the Financial Industry Regulatory Authority.
The investigation by regulators into the unexplained crash has been hampered by their inability to see clearly across all markets and obtain trading data from a single source.
The panel set up to advise regulators on emerging regulatory issues provided little insight into the market crash. It is made up of former and current regulators and other financial luminaries. It includes Nobel laureate economist Joseph Stiglitz and Richard Ketchum, a market regulator for more than 30 years and currently the head of Finra.
Brooksley Born, who has been praised for trying to regulate the $615 trillion over-the-counter derivatives market when she was the chairman of the CFTC, also is on the panel.
(Reporting by Christopher Doering and Rachelle Younglai; editing by Dave Zimmerman and Andre Grenon)
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