“Flash Crash” Report: No Model of Clarity, Explanation, Future Prevention

We long ago identified Friday afternoon – or even better – night as the best time to release anything an organization considers “bad news”,

and, sure enough, the joint Securities & Exchange Commission [ SEC ] / Commodity Futures Trading Commission [ CFTC – think “derivatives” ] did just that

We long ago identified Friday afternoon – or even better – night as the best time to release anything an organization considers “bad news”,

and, sure enough, the joint Securities & Exchange Commission [ SEC ] / Commodity Futures Trading Commission [ CFTC – think “derivatives” ] did just that

with its far from clear “explanation” of how the so-called May 6 Flash Crash – that dropped the Dow Jones Industrial Average about 600 points in around 5 minutes – could have happened.

We’re now getting the initial reports, and will cover it over the weekend – if there’s anything WORTH covering – but, sadly, what we’ve seen so far does little to explain

EITHER how the crash could have happened, even if they can now say “WHAT” happened OR how to make sure it doesn’t happen again.

That may change in the days to come, and we’ll be glad if it does, but we’re also doubtful it will 😉 .

And we’re equally doubtful it’s going to stop the flow of investors OUT of equities markets.

Here’s the best, not surprisingly, from the New York Times:

A single sale of $4.1 billion in futures contracts by a mutual fund touched off a series of events that led to the so-called flash crash,

the sharp stock market decline that shook investors and markets on May 6, federal regulators said on Friday – ahem 😉 .

In a long-awaited report, the Securities and Exchange Commission and the Commodity Futures Trading Commission said

they had identified the sequence of events that erased more than 600 points from the Dow Jones industrial average in minutes

on the afternoon of May 6 before the markets recovered just as quickly.

The report found that the plunge was not caused by any market manipulation

but by a single firm trying to hedge its investment position, if in an aggressive and abrupt manner.

But how reassuring is that, when you think about it ???

One firm pulls a weird move and the whole market nearly collapses — that just makes you feel really solid about equity markets, doesn’t it ???

No wonder small investors are fleeing stock markets in droves — they’re absolutely right: the market’s structure is UNSOUND.

The regulators hope the report lifts the uncertainty that has hung over the nation’s exchanges — and in investors’ minds — since the wild gyrations in May.

But we wouldn’t bet on it.

“This report identifies what happened and reaffirms the importance of a number of the actions we have taken since that day,”

Mary L. Schapiro, the S.E.C. chairwoman, and Gary Gensler, the chairman of the C.F.T.C. said in a statement.

“We now must consider what other investor-focused measures are needed to ensure

that our markets are fair, efficient and resilient, now and for years to come,” they said.

The regulators had already identified in an earlier report the single large sale of futures contracts as playing an important role in the May 6 plunge.

But in the new findings published Friday, the regulators emphasized the central role this large sale played on a day when markets were already under pressure because of the debt crisis in Greece.

It said that at about 2:32 p.m., a mutual fund — which was not identified in the report, but which officials have identified as Waddell & Reed Financial of Kansas —

started a program to sell 75,000 E-Mini Standard &Poor’s 500 futures contracts, using computer sell algorithms.

Normally, a sale of this size would take place over as many as five hours, but the large sale was executed in 20 minutes, the regulators said.

That this crashed the market is supposed to REDUCE uncertainty ???

The algorithm was programmed to execute the trade “without regard to price or time,” the report said.

The selling pressure was then transferred from the futures markets to the stock market, leading to the abrupt drop in individual stocks.

And this means WHAT, exactly ???

Whether the ambiguity is in the report itself — in which case it’s a bit of a cover-up, wouldn’t you say ??? —

or in the reporting of the report — in which case it’s really weak journalism, even for business —

this is one of those phrases that SOUNDS “reassuring”, but a) doesn’t mean too much anyway and b) what it DOES mean is a long step from REDUCING uncertainty.

Stock and stock-index futures prices were already declining on May 6 when, about 2:42 p.m., they suddenly plunged by more than 5 percent over the next five minutes.

When prices bottomed at about 2:46 p.m., the Dow Jones industrial average was down nearly 990 points, 9.1 percent below where it had started the day.

Almost as quickly as prices dropped, however, they rebounded, with the Dow industrials recovering 543 points in about 90 seconds.

The Dow finished the day down 347.80, or 3.2 percent, at 10,520.32.

AS WE ALL KNEW ALREADY AND HAD DECISIVELY ANALYZED WITHIN HOURS AFTER IT HAPPENED.

Following the preliminary report in May, the S.E.C. announced it was temporarily instituting circuit breakers on all the stocks in the S. & P.’s 500-stock index, in an effort to stop another crash happening again.

It has since expanded the circuit breakers — which halt trading in a stock for five minutes if the price moves by 10 percent or more in a five-minute period — to a broader range of stocks.

In every week since the May 6 plunge, there have been outflows by ordinary investors from domestic stock market mutual funds,

according to estimates from the Investment Company Institute.

The institute prefers to rely on monthly figures — but even that data shows

monthly withdrawals by retail investors from stock market mutual funds.

In May alone, $19 billion was taken out by investors from domestic stock market funds,

as WE reported in a much-under seen and insufficiently-“Liked” Feature that people should revisit immediately 😉 .

Some analysts have said this withdrawal may be explained, in part, by

• a souring of confidence among ordinary investors caused by the sharp stock market gyrations,

• the increasing share of trading on the nation’s exchanges claimed by computerized high-frequency traders, and

• perhaps also the authorities’ subsequent inability to immediately pinpoint the cause of the May plunge.

Imagine that — IT’S ONLY BEEN FOUR MONTHS !!!

The report is the fruit of months of work by investigators at both the S.E.C. and the C.F.T.C. in Washington.

They have combed through mountains of data to identify patterns in the buy and sell statistics on the exchanges.

They also conducted many dozens of interviews with traders, big investors and exchanges who were active in the markets on May 6.

As we said, VERY reassuring — NOT !!!