A surge in quote traffic immediately followed by heavy sales of key securities may have sparked the “flash crash” on U.S. stock markets on May 6, a firm that has provided key insights into that day’s events said on Monday.
The sale of $125 million worth of Chicago Mercantile Exchange S&P500 stock index e-mini futures contracts at 2:42 p.m. on May 6, followed 25 microseconds later by the sale of more than $100 million worth of popular exchange-traded funds (ETFs) appears to have triggered the sell-off, datafeed vendor Nanex LLC said.
About 400 microseconds before the S&P500 stock index futures contracts were sold, quote traffic for all New York Stock Exchange, NYSE Arca, and Nasdaq stocks surged to saturation levels within 75 microseconds, said Nanex, a firm that coined the phrase “quote stuffing.”
“This is a new and surprising discovery,” Nanex said. Previously “we thought the increase in quote traffic coincided with the heavy sales,” the firm said.
The discovery is surprising as nearly all the trades in the stock index futures and ETFs occurred at the prevailing “bid,” or price at which a buyer is willing to pay, Nanex said.
Such an occurrence would suggest that liquidity was removed from the market, a potential cause for the steep market drop on May 6, which regulators have said they are investigating.
The popular E-mini stock futures contract tracks the benchmark S&P500 stock index, while among the various ETFs traded at the time were the SPDR S&P 500 share.
Quote traffic surged when the ETFs were sold and remained at saturation levels for nearly 500 microseconds. Seconds later additional selling waves occurred, sending quote traffic levels back to saturation points, Nanex said.
The tidal wave of data caused delays in many data feeds, Nanex said, including two notable ones – the NYSE network that feeds into the consolidated quote system and the one used to calculate and disseminate the Dow Jones stock indexes.
A brief collapse in stock prices also occurred a week earlier on April 28 that was similarly marked by high quote traffic that pushed datafeeds to saturation point and a sudden burst of trading in e-minis and ETFs, Nanex said.
Nanex has alleged that a large number of rapid-fire orders to buy or sell stocks had been deliberately placed and immediately canceled to take advantage of the market turmoil.
Commissioner Scott O’Malia of the Commodity Futures Trading Commission told Reuters in early September that the futures regulator was reviewing data from Nanex.
The CFTC and Securities Exchange Commission plan to soon release a report on the flash crash, which caused the Dow Jones industrial average to shred some 700 points in minutes, before sharply rebounding.
