Gary Gensler, the chairman of the Commodity Futures Trading Commission, today described potential regulatory responses that would seek to prevent another market-shaking event like the May 6 flash crash, during which the Dow Jones Industrial Average lost nearly 1,000 points only to bounce back sharply within a roughly 20-minute span.
Gensler’s remarks follow Friday’s report by the CFTC and the Securities and Exchange Commission on the events that precipitated the May 6 crash. The report faced some criticism for offering no new solutions despite its deep investigation into the market environment that enabled the crash. According to the report, a large investment fund sold off a large amount of E-Mini futures tied to the broad S&P 500 index. An executing broker used a trading algorithm to sell off $4.1 billion worth of the futures. A combination of low liquidity in the markets and other trading programs’ automatic selling of the futures triggered the broad sharp selloff.
Gensler outlined several rules suggested by the CFTC-SEC Joint Advisory Committee on Emerging Regulatory Issues:
- Regulators could force executing brokers — entities that finalize trades for clients — to buy and sell “in an orderly manner.” Gensler also posed the question: “Might customers also have an obligation for orderly execution, and if so, under what circumstances?”
- Improving the visibility of order books: “One of the problems on May 6 was that a large sell order overwhelmed existing liquidity in the E-Mini order book. Might fuller visibility of the order book lessen the chance of market disruptions resulting from such large buy or sell orders in the future? If so, what is the best way to accomplish a goal of increased visibility into the full order book?”
- Revise policies governing market pauses. A five-second market pause in E-Mini futures trading helped replenish the order book for the contract, improving market liquidity. Said Gensler: “Would it have been better if the pause came earlier? If so, what conditions should trigger a pause? Should cross market circuit breakers be adjusted from their current 10 percent limit?”