The Commodity Futures Trading Commission and the Securities and Exchange Commission held the first meeting of the newly formed joint advisory committee on emerging regulatory issues on May 24. The committee, which consists of eight former government officials and industry leaders as well as several prominent academics, spent most of the meeting listening to a presentation by CFTC and SEC officials on the extreme market movements that took place on May 6. While the staff have not identified the exact causes of the turmoil, the presentation indicated that they are focusing on several inter-related factors, including a wave of selling in the stock index futures markets, the lack of coordination among stock trading venues, uncertainty about trade cancellation policies, delays in market data, the use of “stub quotes” in the equity markets, and a sudden withdrawal of liquidity by market makers.
CFTC staff concentrated on activity in stock index futures. Both volume and volatility in the CME’s E-mini S&P 500 futures were much higher than normal on May 6. Volume that day was 2.6 times above the average level and the fifth highest in five years, according to the CFTC staff presentation. The price range that day was 112.75 points, the second highest range in five years. Between 2:30 and 3:00 p.m., the short window of time in which the market turmoil was at its peak, volume in the E-mini contract was 10 times the average level.
During that half-hour period on May 6, bid-offer spreads widened and market depth decreased notably on the buy-side of the order book, the CFTC staff said. Although bid-offer spreads quickly returned to normal levels after CME triggered its stop logic functionality at 2:45 p.m., the depth of the market—as measured by the number of bids and offers five-deep in the order book—was much lower than before.
The CME’s stop logic functionality is designed to stop a cascade of stop loss orders from causing an excessive downward spike in prices. When the stop logic is triggered, the market goes into a five-second pause that allows new orders to be submitted to the exchange and matched against the stop loss orders that are awaiting execution. CME officials have explained that this functionality brings additional liquidity into the market and permits the market to regain its equilibrium.
