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SEC's Report on 'Flash Crash': Still No Answers

The SEC has released its Preliminary Report on the Market Events of May 6th. (151 pages. Thank you.)

The report does not cite any single cause for the nearly 1,000 point drop in the Dow.

Importantly, the SEC "found no evidence that these events were triggered by 'fat finger' errors, computer hacking, or terrorist activity, although we cannot completely rule out these possibilities."

So what did cause the drop? They are "focusing" on six working hypoteses and findings:

"(1) possible linkage between the precipitous decline in the prices of stock index products such as index ETFs and the E-mini S&P 500 futures, on the one hand, and simultaneous and subsequent waves of selling in individual securities, on the other, and the extent to which activity in one market may have led the others;

(2) a generalized severe mismatch in liquidity, as evinced by sharply lower trading prices and possibly exacerbated by the withdrawal of liquidity by electronic market makers and the use of market orders, including automated stop-loss market orders designed to protect gains in recent market advances;

(3) the extent to which the liquidity mismatch may have been exacerbated by disparate trading conventions among various exchanges, whereby trading was slowed in one venue, while continuing as normal in another;

(4) the need to examine the use of 'stub quotes,' which are designed to technically meet a requirement to provide a "two sided quote" but are at such low or high prices that they are not intended to be executed;

(5) the use of market orders, stop loss market orders and stop loss limit orders that, when coupled with sharp declines in prices, for both equity and futures markets, might have contributed to market instability and a temporary breakdown in orderly trading; and

(6) the impact on Exchange Traded Funds (ETFs), which suffered a disproportionate number of broken trades relative to other securities. "

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