SEC CFTC Report Revealing The Findings of Their Investigation of the "Flash Crash"

Joint SEC-CFTC investigative report into the so-called Flash Crash of May 6, 2010.


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R E P O R T   O F   T H E   S T A F FS O F   T H E   C F T C
A N D   S E C   T O   T H E   J O I N T A D V I S O R Y
C O M M I T T E E   O N   E M E R G I NG
R E G U L A T O R Y   I S S U E S


C O N T E N T S
EXECUTIVE SUMMARY..................................................................................... 1
What Happened?............................................................................................ 1
Liquidity Crisis in the E-Mini ............................................................................ 3
Liquidity Crisis with Respect to Individual Stocks ............................................ 4
Lessons Learned ............................................................................................ 6
About this Report ............................................................................................ 8
I. TRADING IN BROAD MARKET INDICES ON MAY 6..................................... 9
I.1. Market Conditions on May 6 Prior to the Period
of Extraordinary Volatility ....................................................................... 9
I.2. Stock Index Products: The E-Mini Futures Contract
and SPY Exchange Traded Fund ........................................................ 10
I.3. A L o s s o f L i q u i d i t y..................................................................................... 11
I.4. Automated Execution of A Large Sell Order in the E-Mi n i...................... 13
I.5. Cross-Market Propagation ..................................................................... 16
I.6. Liquidity in the Stocks of the S&P 500 Index.......................................... 18
II. MARKET PARTICIPANTS AND THE WITHDRAWAL OF LIQUIDITY .......... 32
II.1. Over view ............................................................................................... 32
II.2. Market Participants ................................................................................ 35
II.2.a. General Withdrawal of Liquidity ................................................ 35
II.2.b. Traditional Equity and ETF Market Makers ............................... 37
II.2.c. ETFs and May 6 ....................................................................... 39
II.2.d. Equity-Based High Frequency Traders ..................................... 45
II.2.e. Internalizers .............................................................................. 57
II.2.f. Options Market Makers............................................................. 62
II.3. Analysis of Broken Trades ..................................................................... 63
II.3.a. Stub Quotes.............................................................................. 63
II.3.b. Broken Trades .......................................................................... 64
III. POTENTIAL IMPACT OF ADDITIONAL FACTORS .................................... 68
III.1.NYSE Liquidity Replenishment Points ................................................... 68
III.2.Declarations of Self-Help against NYSE Arca ........................................ 73
III.2.a. Overview of Rule 611 and the Self-Help Exception................... 73
III.2.b. Evaluation of Self-Help Declarations on May 6 ......................... 75
III.3.Market Data Issues................................................................................ 76
IV. ANALYSIS OF ORDER BOOKS.................................................................. 80
IV.1. Analysis of Changes in Liquidity and Price Declines............................. 80
IV.2. Detailed Order Book Data for Selected Securities ................................ 8

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