Flash crash probe plays down quote-stuffing
Published: September 3 2010 01:07 | Last updated: September 3 2010 01:07
Regulators probing the causes of the May 6 flash crash have concluded that quote-stuffing – placing and then almost immediately cancelling large numbers of rapid-fire orders to buy or sell stocks – was not a “major factor” in the turmoil, a person familiar with the inquiry said on Thursday.
However, the practice of quote-stuffing has come under increased scrutiny by regulators in both the equities and futures markets.
The Commodity Futures Trading Commission on Thursday confirmed it was reviewing data from Nanex, a database developer, which has suggested high-frequency trading firms could have used quote-stuffing to create arbitrage opportunities by slowing down electronic stock-trading networks or distracting their rivals.
Scott O’Malia, a CFTC commissioner, said on Thursday that “if traders are flooding the market with orders with the intention of slowing other traders down”, the regulator should consider looking at the practice in the futures markets. “I personally don’t see the value of the quote-stuffing trading behaviour and I believe the Commission has authority under the disruptive trading provisions in the Dodd-Frank Act [passed this summer] to address this behaviour,” Mr O’Malia said.
A joint review by the CFTC and the Securities and Exchange Commission into the causes of the flash crash is due in a further report this month.
The regulators have yet to come up with a definitive identification of the root cause of the wild gyrations in stock prices over a 20 minute period on May 6.
But the inquiry has increased the focus on high- frequency traders and their use of computerised trading programmes – algorithms – to profit from fractional price differentials.
Mr O’Malia said on Thursday that the CFTC “must look beyond the traditional pit trading enforcement rules and adapt our oversight and enforcement capabilities to a wide range of computer trading behaviour to ensure futures markets continue to provide price discovery and hedging functions”.
Some algorithms might use quote stuffing to gain a price edge over rivals, according to Nanex.
The company has supplied the SEC with its computer programming application, which, combined with other data, can allow the authorities to identify who is behind disruptive trades.
“This whole business of sending in 5,000 quotes in one second is usually confined to half a dozen stocks at any given moment,” Eric Hunsader, Nanex founder, told Reuters. “If it happened in 50 stocks in the same second, it would overwhelm the system.”
The SEC and CFTC on Thursday declined to comment on the flash crash review.