SEC Remains Baffled by Market Crash

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Ok. So here’s what we do know. It is very unlikely that a “fat finger”–Wall Street lingo for a trader keying in the wrong trade, say selling billions of shares instead of millions–caused the market crash. But what did? Mary Shapiro, the head of the Securities and Exchange Commission, told a Congressional panel today that the SEC still can’t determine why the market dropped 1,000 points in 16 minutes. Here’s what Shapiro has to say via

Mary Schapiro, chairwoman of the Securities and Exchange Commission, said that the SEC cannot point a single cause behind the events of May 6. The Dow Jones industrial average plummeted 1,000 points, representing about $1 trillion in market value, between 2:40 p.m. and 3:00 p.m. ET last Thursday.

The SEC has historically been one of the slowest moving agencies. They never brought charges against Madoff, until he basically turned himself in, and even the Goldman case is about something that happened a little over two years ago, which in SEC time is kind of quick. But those are investigations where the SEC has to make a judgment call about what is legal and what is fraud. That’s not what we are asking for here. Just a basic accounting of who traded what. And even that the SEC can’t produce. Aren’t these guys supposed to be monitoring the market in real time?

Schapiro said her agency’s preliminary investigation has looked at a sharp drop in the value of a particular stock future called the E-mini S&P 500, which investors use to bet on the future performance of stocks in the broad stock index.

The E-mini S&P 500 futures price fell by more than 5% in a few minutes and then quickly recovered, according to Schapiro.

“It should be no surprise that the broader stock market indexes showed similarly fast and similarly large declines and recoveries,” Schapiro said, since stock prices follow futures prices.
But the correlation doesn’t fully explain what happed on Thursday, she added, saying “It could have as readily been events or anomalous activities in individual stocks that caused someone to trade first in the futures markets.”

The SEC is also looking into “massive intraday price swings” in shares of many Exchange Traded Funds as a possible factor in the crash, Schapiro said. The shares of more than a quarter of all ETFs experienced brief declines of more than 50% in Thursday’s tumult.

“Ultimately, we may learn that the extraordinary disruption in trading, however it may have been triggered, was the result of a confluence of events which, taken together, exacerbated what already had been a down day and led to an extraordinarily steep price drop and recovery,” said Schapiro.

I think the interesting thing here is that the 1,000 point drop is highlighting problems not just about the market, but the SEC’s ability to monitor the market. The problem is what caused the market to drop does not only have to do with electronic trading, but that a lot of that electronic trading goes on in “Dark Pools.” Market watchers have warned about these dark pools for some time, but it hasn’t been clear just how much the SEC knows about them. Generally, the exchanges, which make a lot of money off the dark pools, have promoted the practice and have said they have a handle on who is trading what, and have the ability to police what goes on in the dark pools. It’s clear now that that is not the case.

To her credit Shapiro has been looking into dark pools. But the fact that the SEC can’t determine who bought or sold what during a mere 16 minutes of trading proves that there is a lot more that needs to be done to shed light on the shady corners of the market.