The ‘flash crash’ that temporarily floored US share prices on 6 May has dented investor confidence in market structure, but market participants broadly support the regulatory response, responses to a survey from consultancy TABB Group suggest.
On 6 May, markets in the US suffered huge intraday drops in the space of just 30 minutes, before rebounding just as quickly. At its lowest point, the Dow Jones Industrial Average fell almost 1,000 points to 9,869.62, before recovering to 10,520.32, 3.2% down on the previous day’s close. Some stocks, such as Accenture, briefly collapsed to sub-penny levels while many others fell by more than 10%. The four main stock exchanges – NYSE, Nasdaq OMX, BATS and Direct Edge – retrospectively cancelled trades executed at the height of the turmoil, between 14.40 and 15.00 New York time.
TABB’s survey, ‘May 6th and Market Structure Reform: Industry Barometer’, which polled a cross-section of buy- and sell-side institutions, liquidity providers, trading venues and other market participants, found that 21% of buy-side firms had weak or very weak levels of confidence in the US equity market structure post-6 May, compared with 13% for both sell-side and exchange respondents and 11% for liquidity providers.
Furthermore, 37% of buy-side firms considered high-frequency traders to be the primary cause of the crash, while 20% blamed execution algorithms and 35% held the Reg NMS route out rule responsible. To better control high-frequency trading activity, 61% of buy-side firms, 44% of the sell-side and 46% of execution venues surveyed said that high-frequency firms should be made to register as broker-dealers. However, there was disagreement across different types of participants on co-location – 28% of buy-side firms thought it should be banned, compared with just 2% of sell-side firms and 5% of execution venues.
However, most market participants agreed with proposed reforms by the US regulator, the Securities and Exchange Commission (SEC). On 11 May, the SEC announced its intention to implement stock-by-stock circuit breakers, which would halt trading for five minutes should an individual stock deviate by 10% or more from its last sale price over a five-minute period.
A total of 88% of survey respondents agreed that percentage stock-price change is the most suitable gauge for triggering circuit breakers, compared to changes in a stock’s bid-offer spread (22%) or implied volatility percentage (13%).
Thirty-eight per cent of participants said that placing limits on retail stop-loss orders would not be effective in preventing a similar crash. The rapid decline on 6 May is believed by some to have been exacerbated by stop-loss orders, which are placed out of the limits of the normal price range of a stock with the aim of limiting losses in uncertain markets conditions. But 46% of those questioned by TABB were in favour of eliminating stub quotes, which are orders entered in at remote price levels by market makers when they do not want to fulfill their obligations to supply liquidity. The SEC was reported to be mulling a ban on stub quotes earlier this week.
The large-trader reporting system proposed by the SEC in April, which would assign a unique identification number to firms executing high volumes in US equities to help monitor their trading activity, was supported by 45% of those questioned.
“Participants support the large trader rule not because they believe it could alleviate a large plunge but that the SEC would have a better chance at discovering the root cause of wild behaviour,” read the report.