13 May 2010

NYT - CFTC Gary Gensler lays out timeline for wild Wall Street trading

Gary Gensler, the chairman of the Commodity Futures Trading Commission, laid out a detailed timeline on Tuesday for the events that contributed to last Thursday’s wild trading on Wall Street and cited the actions of one unidentified trader in particular.

Mr. Gensler told a House hearing that federal regulators were closely examining the trading activity in the Standard & Poor’s 500 E-Mini futures contract, which is by far the largest stock index futures contract. Meanwhile, Mary L. Schapiro, the Securities and Exchange Commission’s chairwoman, said that “we recognize the pressing need to move rapidly” on the agencies’ investigation of the market plunge.

 

But Ms. Schapiro cautioned that the S.E.C. and the C.F.T.C. still had much work ahead of them. “We should recognize that it will take time to fully analyze the data,” she told the House Financial Services subcommittee on capital markets.

 

According to Mr. Gensler, the C.F.T.C. staff issued “special call” requests to 10 traders with the largest positions in the June 2010 S.& P. 500 E-Mini contract, requesting information on trader positions and all communications related to trading on last Wednesday and on Thursday, the day that the stock market plummeted and then bounced back in a matter of minutes.

 

Mr. Gensler said the C.F.T.C.’s preliminary review of detailed intraday trading records and special call information has found that between 2:42 p.m. and 2:45 p.m. last Thursday, some of the most active traders limited their trading activity in the E-Mini futures contract for some unknown reason.

 

“At 2:45:28, the C.M.E.’s stop-spike mechanism’s five-second pause took effect,” Mr. Gensler said, referring to the Chicago Mercantile Exchange. “Following that pause, the contract’s price began to move upward.”

 

The C.F.T.C. has learned that there were about 250 participants in the S.& P. E-Mini futures contract during the period when the market sold off. Of the 250, the agency is focused on the Top 10 largest longs and Top 10 shorts. Mr. Gensler said the majority of these traders traded on both sides of the market, meaning they both bought and sold during that period — acting, essentially, as liquidity providers.

 

But one of these accounts was using the E-Mini contract to hedge and only entered sell orders, meaning that the trader was betting that prices would fall.

 

“That trader entered the market at around 2:32 and finished trading by around 2:51,” Mr. Gensler said in his testimony. “The trader had a short futures position that represented on average 9 percent of the volume traded during that period.”

 

It is unusual for one trader to command such a large portion of a huge market like the S.& P. 500 E-Mini. Those futures contracts account for more than 80 percent of the notional value of American stock index futures open interest and trade on the CME Globex electronic trading system. This trader sold on the way down and continued to do so even as the price level recovered. It could be that this trader was actually a computer of some sort going haywire.

 

In later testimony, Terrence A. Duffy, executive chairman of the CME Group, which runs the Chicago Mercantile Exchange, questioned the role the E-Mini futures might have played in Thursday’s plunge. He told the House subcommittee that futures by design are meant to lead the market, so it was not unusual that the drop in the E-Mini futures occurred prior to when the stock market reached its lows.

 

“Futures contracts, by design, provide an indication of the market’s view of the value of the underlying stock index,” Mr. Duffy told the panel. “Casual observation may lead to the conclusion that the E-Mini S.&P. futures prices appeared to lead the decline in the cash market.”

 

Mr. Duffy noted that the cash (equity) market continued to fall when the Chicago Mercantile Exchange halted trading in the E-Mini for five seconds. The E-Mini rallied when trading resumed but some individual stocks continued to fall. After a few seconds the market corrected, following the E-Mini back up.

 

Go to Prepared Testimony from Gary Gensler (pdf) »
Go to Prepared Testimony from Mary L. Schapiro (pdf) »
Go to Prepared Testimony of Terrence A. Duffy (pdf) »
Go to Hearing Agenda from House Subcommittee on Capital Markets »
Go to Webcast of House Hearing »

 

NYT Article

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