Monday, May 10, 2010

Are circuit breakers a plunge panacea?

If you were checking in with us on Twitter over the weekend, you probably noticed our search for answers regarding the May 6 market plunge.

Some of our pals were quick to offer up some articles that sought to explain the 1 cent prints and canceled trades that grew out of Thursday's drop. If you'd like to find those, just search for the May 7th tweets on our page.

Today, Breaking News alerts us to this Bloomberg BusinessWeek piece on the stock exchanges seeking coordination of circuit breakers and halt of trading rules. Here's the crux of that piece:

"...Executives from six securities venues agreed on a framework for “strengthening circuit breakers and handling erroneous trades,” according to a statement from the Securities and Exchange Commission. NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc., Direct Edge Holdings LLC, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. met with SEC Chairman Mary Schapiro today.

“The differences in order handling employed by U.S. markets needs significant work and must be addressed,” wrote Joe Ratterman, the chief executive officer of five-year-old alternative exchange Bats, in an e-mail before the meeting. “When acting alone, apart from each other, these differences might prove to be a big part of the very problem they are trying to handle.”

Rules to slow trading or shut markets during volatile periods may have prevented the biggest losses on May 6, when the Dow Jones Industrial Average fell 998.5 points intraday, executives from Bats, Direct Edge and White Cap Trading LLC said prior to today’s announcement..."

Even today, I'm hearing experienced market participants express frustration over the lack of any real explanation for what went wrong last Thursday. We went from a day of rumors about fat-finger trades to a gradual understanding and building narrative about trades being routed to electronic markets with a lack of bids, but I think we still have some unanswered questions and a great deal of lost trust in our capital markets right now.

What do you think caused the acceleration of last Thursday's decline? Will we find a solution to the problems of evanescent liquidity, and are more circuit breakers and exchange coordination plans the answer to these problems?

Related articles and posts:

1. Exchanges agree to market-wide circuit breakers -

2. About last Thursday: more circuit breakers or fewer? - Barron's.

3. BarCap on flash crash: 'a perfect storm' - FT Alphaville.