Flash-Crash Probe Looks Closely at 'Quote Stuffing'

U.S. regulators probing the May flash crash are focusing on a trading practice known as "quote stuffing" in which large numbers of rapid-fire orders to buy or sell stocks are placed and canceled almost immediately.

Getty Images Up to 5,000 orders per second were placed in individual stocks at times during the flash crash, a study says.

The Securities and Exchange Commission and the Commodity Futures Trading Commission are also examining something called sub-penny pricing, said a person familiar with the "flash crash" probe.

CFTC Commissioner Scott O'Malia told Reuters Thursday his agency is reviewing data from Nanex LLC, a trade database developer that issued a study suggesting computer algorithms used quote stuffing to gain an edge during the May 6 crash.

"If traders are flooding the market with orders with the intention of slowing other traders down, then we should consider addressing this under new disruptive trading practices authority," O'Malia said.

He serves as head of the CFTC's technology advisory committee, which in July raised concerns about what effect quote stuffing has on investors and prices.

"I don't see how quote stuffing as a trading practice benefits futures markets," O'Malia said.

The SEC and the CFTC have yet to explain what caused the crash that drove the Dow Jones industrial average down some 700 points in minutes, before sharply rebounding. The SEC is still requesting "a huge amount of general data" from exchanges and other trading venues, said a second person familiar with the investigation.

Quote-stuffing happens regularly, causing the prices of stocks that appear to have a deep order book of interest to move very quickly, a third source familiar with the probe said.

Up to 5,000 orders per second were placed in individual stocks at times during the flash crash, the Nanex study said.

"If you have a time advantage you can always turn that into gold on Wall Street," Nanex founder Eric Hunsader told Reuters Insider last week.

The SEC is also looking at "sub-penny pricing" in the wide-ranging probe, the first source said.

In sub-penny pricing, non-exchange venues including anonymous dark pools are believed to quote and execute orders priced in increments as small as one-tenth of a cent.

An SEC spokesman declined to comment.

Regulators plan to issue a follow-up report on the flash crash this month.