Investigators seeking an explanation for last week’s brief stock market panic said Sunday that they were focusing increasingly on how a broad decline of blue-chip stocks might have set off an uncontrolled response from new high-speed trading networks.
These networks went haywire after they detected that trading in an unusually large number of stocks had been slowed down by the New York Stock Exchange because they had already begun to fall sharply, according to an official familiar with the investigation.
That could mean that the computers first flooded the market with sell orders that could not be matched with buyers. Then, just as quickly, many of these networks withdrew from trading. The combined effect might have set off a chain reaction that sent shares of many companies spiraling during the 15-minute frenzy.
After a weekend of analysis, many specialists at the major exchanges no longer believe that a single large sell trade in one stock, like that of Procter & Gamble, was the trigger. Instead, they suspect that a mismatch in rules between the older NYSE and younger electronic exchanges set off a frightening sequence of events.
Ever since computerized trading became a major force in the nation’s stock markets over the past four or five years, experts have been warning that the lack of consistent rules among exchanges and the increasing complexity and speed of computer systems could destabilize markets. This appeared to happen last Thursday, when the stock market dropped in 20 terrifying minutes by 1,000 points.
The SEC and the heads of four of the main exchanges are due to meet in Washington on Monday to discuss why regulators had failed to act to close the widely flagged weakness in the system, and propose ways to fill it.
In particular, they are looking at why rules on the NYSE forced trading in hundreds of individual stocks to stop at around 2:40 p.m. near the height of the sell-off last Thursday but allowed trading in the same stocks to continue unabated on other electronic exchanges.
As regulators and exchanges continued to feverishly study trading records over the weekend, they began to build a clearer picture of what might have been the original trigger of the sell-off. They are now focusing on a big downward movement in a futures contract on the Chicago Mercantile Exchange which triggered broad selling in a number of individual stocks on several stock exchanges and did not involve one single large sell order on any one stock.
Investigators say the rule on halting trading was designed for a time when the NYSE accounted for the vast proportion of stock trading. But over the past half decade the Big Board’s share of the market has shrunk dramatically — caused, in part, by regulatory changes to encourage new competitors — while ever larger volumes of stocks are traded on electronic venues without such circuit breaker rules.
Investigators are now focusing on the dynamics of what happened last Thursday when “many hundred of stocks” on the NYSE, including five major stocks that make up the Dow Jones industrial average, including Accenture, Procter & Gamble, and 3M went into so-called Liquidity Replenishment Points.
This decision forced trading to switch to slow-motion manual trading as traders on the floor of the stock exchange tried to arrest the decline by manually seeking out bidders.