Market Decline Of May 6, 2010

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In one of the most gut-wrenching hours in Wall Street history, the Dow Jones Industrial Average (DJIA) plunged almost 1,000 points in early afternoon trade on May 6, 2010 before recovering to close down 348.[1]This move represented the biggest one-day point decline on an intraday basis in Dow Jones history. The drop became known in the industry as the "flash crash" of May 6.

Fears about the spread of the European debt crisis dragged on stocks through the early afternoon. It was believed that high-frequency trading exacerbated the move lower. There was also talk that a trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction — including Barclays Capital, the brokerage arm of British bank Barclays PLC — to do their own selling to offset some of the risk.[2]

Some stocks plunged dramatically, including Dow component Procter & Gamble (PG, Fortune 500), which dropped 37 percent to $39.37 per share from the close of $62.12. The consumer products maker recovered most of that loss by the close, ending just 2 percent lower.

Some compared the fear, panic, confusion, and volatility in the marketplace on May 6, 2010, to that seen on the market crash of Oct. 19, 1987, also known as Black Monday.[3]

In the days that followed the May 6, 2010 market decline, both the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) investigated what had occurred during the trading day.[4]SEC chairman Mary Schapiro said in prepared testimony for a hearing in Washington that the rapid drop “undermined confidence in the integrity of the financial markets.” She added that changes needed to be considered to prevent severe disruptions in the future.[5]

In the end, Nasdaq OMX Group canceled more than 10,000 trades after the event. Euronext’s New York Stock Exchange also agreed to cancel “clearly erroneous” trades after hundreds of stocks and exchange-traded funds (ETF).[6]

In May of 2010, major stock exchanges agreed to introduce temporary trading limits on individual stock moves. The leaders of six major exchanges agreed to a structural framework, to be refined over the next day, for strengthening circuit breakers.[7]The New York Stock Exchange, NASDAQ, BATS, Direct Edge, ISE and CBOE — and the Financial Industry Regulatory Authority (FINRA) to discuss the causes of the so called "flash-crash" in the stock market May 6, 2010, the potential contributing factors, and possible market reforms.[8]

Most of the 50 U.S. exchanges regulate themselves and design their own tools for slowing or halting trading.

In July 2010, NYSE Euronext told the SEC it recommends that regulators seek out a broad-based stock index like the Standard & Poor's 500 to underlie a new circuit breaker. BATS Global Markets also expressed support for tying a market-wide circuit breaker to the S&P 500 index. NYSE Euronext has said it supports tightening the existing levels at which such a marketwide trading halt would occur. [9]

CFTC - SEC Report

A report about the market decline on that date, jointly written by the staff of the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) and released in October of 2010, pointed to a large trade made by mutual fund company Waddell & Reed Financial Inc as a trigger for the market plunge that day. The report didn't cite Waddell by name, but said an algorithm the company used to execute a large sell order of the E-mini Standard & Poor's 500 futures contract was based solely on the volume in the futures market "without regard to price or time." The report said volume that day wasn't a good indicator of market liquidity. The sell order of 75,000 contracts prompted a selloff and set off a chain reaction, the report said.[10]

Waddell said it didn't intend to "disrupt" the market through its trading.

Data firm Nanex, LLC questioned regulators' finding, suggesting Waddell's algorithm actually did factor in price because data showed a slowdown in selling by Waddell during the market's steepest decline.[11][12]

Resources


References

  1. Glitches send Dow on wild ride. CNN.Money.
  2. Did A Big Bet Help Trigger 'Black Swan' Stock Swoon?. Dow Jones.
  3. Comparing May 6 2010 To The 1987 Stock Market Crash Intraday. Daily Markets.
  4. SEC Said to Consider New Rules as It Investigates Market Plunge. Bloomberg Businessweek.
  5. SEC Says Market Plunge ‘Unacceptable’. The Globe And Mail.
  6. Nasdaq says more than 10,000 trades have been canceled. The Globe And Mail.
  7. Exchanges to Retool Circuit Breakers. The Wall Street Journal.
  8. Press Release. SEC.
  9. NYSE Backs S&P 500 for Marketwide Circuit Breaker. The Wall Street Journal.
  10. Statement by CFTC Chairman Gensler and SEC Chairman Schapiro on the Joint Report Regarding the Market Events of May 6th. CFTC.
  11. Regulators Defend Report on 'Flash Crash'. WSJ.com.
  12. Illinois data firm points finger toward high-frequency traders in May 6 flash crash. The Kansas City Star.