Talk about insta-outrage: less than one week after last Thursday’s ‘flash crash’, US lawmakers have organised a hearing on the roots of that sudden, short-lived stock market plunge.
The House Financial Committee on Financial Services, via the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises (whew) will host an inquiry into “the stock market plunge: what happened and what is next?”.
Among those scheduled to testify on Tuesday afternoon from 3pm New York time are SEC chair Mary Schapiro, CFTC chair Gary Gensler and senior executives from NYSE Euronext, Nasdaq and the CME Group.
There will be a live webcast of the hearing, but if you’re already jonesing for a fix of Capitol Hill goodness, you can scan the prepared testimony of NYSE’s COO Lawrence Leibowitz and Eric Noll, EVP of Nasdaq OMX.
Here’s some of what NYSE’s Leibowitz will say:
The trading events of May 6 are indicative of broader changes to markets and trading practices for which recent advances in technology have been a catalyst, and which has the SEC wisely has opened for review.
…
The May 6 market drop certainly should inform the SEC’s current examination of the changes in the markets, and in particular how certain advances in technology may have fostered trading practices that negatively impact the entire market.
And here’s Nasdaq’s Noll, emphasis ours:
last Thursday’s trading events appear to have involved the trading of equities, options, and futures…one factor in Thursday’s events was unusually heavy trading of the “E-Mini June,” a popular futures product that tracks the expected value of the S&P 500 Index for June 2010. Trading of the E-Mini future correlates closely with equities and options that also track the S&P 500 Index, such as the SPY Exchange Traded Fund, as well as individual stocks that comprise that index, such as Proctor and Gamble.
To understand fully the events of May 6th, you have to understand the state of the markets heading into last week. Markets were nervous. Equity markets have experienced an unusually long and large upward price movement. From a market low below 1,300 on March 9, 2009, the NASDAQ composite index had risen steadily to 2,535 on April 26, 2010. Market analysts will tell you that following such gains of almost 100 percent, it is not unusual for markets to experience a price correction.
Markets were becoming increasingly volatile. NASDAQ monitors the CBOE Volatility Index or VIX, which measures the implied volatility of the S&P 500 expected over the next 30 days. From its inception in March 2004 through July 2007, the VIX generally measured below 20. The index rose during the financial crisis, reached a high of 89 on October 24, 2008, and then gradually declined throughout 2009 and early 2010. From February 26, 2010 through April 26, 2010, the VIX continuously stayed below 20, dropping below 16 on April 12th and April 20th. Volatility returned on April 27th, when the VIX once again broke above 20 and began rising steadily. By May 5th the VIX reached the upper 20s, and on May 6th and 7th it closed above 30.
This increased volatility is tied to the escalating financial crisis in Greece and the Eurozone. Although the turmoil in Greece has been percolating for several months, the potential harm seemed to sink in to U.S. markets only last week. Within the last two weeks credit ratings agencies lowered their rating of the sovereign debt of Greece, Spain and Portugal, roiling sovereign debt markets; the European Union and International Monetary Fund were working to fashion workable bailouts; and social tensions and violence escalated in Athens. The Euro has lost 15 percent of its value in the last six months, including seven percent in the last two weeks alone.
Against this backdrop, we arrive at a truly unique confluence of events at 2:35 p.m. on the afternoon of May 6th.
The unique confluence of events sounds a lot like what BarCap analysts described as a ‘perfect storm‘ in the markets on Thursday.
Noll’s testimony is worth reading in full, not least for his handy timeline of events on the day.
Related links:
Thursday’s crash might really have been a Black Swan event – FT Alphaville
Let the Exchange Blame Game Begin! – WSJ Market Beat
ETFs and the ‘flash crash’ – FT Alphaville
SEC eyes trading circuit breakers – FT