Federal investigators probing the “flash crash” that briefly sliced nearly 1,000 points off the Dow Thursday are zeroing in on a series of “unusually high-volume” trades in S&P futures that originated in Chicago, a government official told POLITICO.
Those trades set off a chain reaction of trades that caused the biggest drop within a single day in the Dow Jones Industrial Average’s storied history.
Officials at the Securities and Exchange Commission and the Commodity Futures Trading Commission briefed Washington policymakers late Friday on their theory of what triggered the plunge.
According to the government official, investigators have traced the calamity back to the trades in Chicago, which were picked up by automated trading computers in New York. The New York computers in turn issued a series of sell orders, which had a cascading effect on the Dow as even more programs picked up on the trading and issued their own sell orders.
When the New York Stock Exchange slowed down its computerized trading in response to the sell-off, sellers turned to other exchanges. That increased volatility in the markets was in turn picked up by computerized algorithms, which executed even more sell orders.
“They can see on the tape what made it more volatile,” the government official said. “They can see what the accelerators were. What they don’t know is what set the whole chain in motion. They’re still a few links in the chain away from that.”
The decision by the NYSE to slow down trading Thursday has set off a furious debate between the exchanges over what would have been the right course of action in response to the market drop.
And the breathtaking 1,000-point drop has also heightened calls to regulate so-called high frequency trading, in which buyers and sellers use ultrafast computers to trade in and out of stocks in fractions of a second. Critics say such lightning-quick trading increases volatility in the market and can make a sell-off much worse in a crisis.
Democratic Sens. Mark Warner of Virginia and Ted Kaufman of Delaware on Friday proposed adding language to the Senate’s Wall Street reform bill calling on the SEC and CFTC to report back to Congress within 60 days on the causes of the 1,000-point drop and to look into the risks of such high-frequency trading.
On Thursday, the market recovered to lose 350 points. The Dow lost almost 140 points on Friday, to close at 10,380.
The Securities and Exchange Commission and the Commodity Futures Trading Commission released a statement Friday after markets closed.
“We are continuing to review the unusual trading activity that took place briefly yesterday afternoon to pinpoint its cause and contributing factors,” the statement said. “Our market oversight units are reviewing trading and market data from the exchanges, self-regulatory organizations and market participants to examine yesterday's unusual trading activity. We are scrutinizing the extent to which disparate trading conventions and rules across various markets may have contributed to the spike in volatility.”
“Thursday’s unusual trading activity included extreme volatility for a number of individual securities. This is inconsistent with the effective functioning of our capital markets, and we will make whatever structural or other changes are needed.”
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