CFTC/SEC Release Preliminary Findings on May 6 Unusual Market Events: Was NYSE The Cause?

The staffs of the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) released preliminary findings related to the unusual market events on May 6, 2010.

The report notes:

In addition, we are exploring the impact of “self-help” being invoked by NASDAQ and BATS against NYSE Arca. As NYSE Arca is the primary listing exchange for almost all ETFs, the loss of access to NYSE Arca’s liquidity pool may have had a disproportionate impact on market liquidity and trading for ETFs.

Self help is declared against an exchange when that exchange is not responding in the proper time frame. Many of the ETFs are traded on NYSE Arca and many of the NYSE Arca ETFs trades were canceled because the prices of the ETFs were below, after the fact, acceptable levels.

Additionally, there is anecdotal evidence that computerized traders withdrew their bids to buy shares (turned off their algorithms) because they expected many trades would be canceled because of the sharp decline in the price of the trades and they did not know beforehand the cutoff price for canceling trades.

One has to wonder if the NYSE Arca system and the lack of known SEC and NYSE price bounds for canceling trades was the cause of all the problems and not traders. Of course, since the SEC and NYSE are the ones looking for the causes of the decline, one wonders how much responsibility they will take for the stock market loss of liquidity and intra-day decline in the final report?

The 151 page report is available online from the CFTC, on Scribd and embedded below.

SEC-CFTC Preliminary Findings Regarding the Market Events of May 6, 2010