FINDINGS REGARDINGTHE MARKET EVENTSOF MAY 6, 2010
REPORT OF THE STAFFS OF THE CFTCAND SEC TO THE JOINT ADVISORYCOMMITTEE ON EMERGINGREGULATORY ISSUESSEPTEMBER 30, 2010
This is a report of the findings by the staffs of the U.S. Commodity Futures TradingCommission and the U.S. Securities and Exchange Commission. The Commissions haveexpressed no view regarding the analysis, findings or conclusions contained herein.
U.S. Commodity Futures Trading CommissionThree Lafayette Centre, 1155 21
st
Street, NWWashington, D.C. 20581(202) 418-5000
May 6, 2010 Market Event Findings
CONTENTS
EXECUTIVE SUMMARY ..................................................................................... 1What Happened? ............................................................................................ 1Liquidity Crisis in the E-Mini ............................................................................ 3Liquidity Crisis with Respect to Individual Stocks ............................................ 4Lessons Learned ............................................................................................ 6About this Report ............................................................................................ 8 I. TRADING IN BROAD MARKET INDICES ON MAY 6 ..................................... 9I.1. Market Conditions on May 6 Prior to the Periodof Extraordinary Volatility ....................................................................... 9 I.2. Stock Index Products: The E-Mini Futures Contractand SPY Exchange Traded Fund ........................................................ 10I.3. A Loss of Liquidity ..................................................................................... 11I.4. Automated Execution of A Large Sell Order in the E-Mini ...................... 13I.5. Cross-Market Propagation ..................................................................... 16I.6. Liquidity in the Stocks of the S&P 500 Index .......................................... 18 II. MARKET PARTICIPANTS AND THE WITHDRAWAL OF LIQUIDITY .......... 32II.1. Overview............................................................................................... 32II.2. Market Participants ................................................................................ 35II.2.a. General Withdrawal of Liquidity ................................................ 35II.2.b. Traditional Equity and ETF Market Makers ............................... 37II.2.c. ETFs and May 6 ....................................................................... 39II.2.d. Equity-Based High Frequency Traders ..................................... 45II.2.e. Internalizers .............................................................................. 57II.2.f. Options Market Makers ............................................................. 62II.3. Analysis of Broken Trades ..................................................................... 63II.3.a. Stub Quotes.............................................................................. 63II.3.b. Broken Trades .......................................................................... 64 III. POTENTIAL IMPACT OF ADDITIONAL FACTORS .................................... 68III.1. NYSE Liquidity Replenishment Points ................................................... 68III.2. Declarations of Self-Help against NYSE Arca ........................................ 73III.2.a. Overview of Rule 611 and the Self-Help Exception ................... 73III.2.b. Evaluation of Self-Help Declarations on May 6 ......................... 75III.3. Market Data Issues ................................................................................ 76 IV. ANALYSIS OF ORDER BOOKS .................................................................. 80IV.1. Analysis of Changes in Liquidity and Price Declines............................. 80IV.2. Detailed Order Book Data for Selected Securities ................................ 83
May 6, 2010 Market Event Findings
This report presents findings of the staffs of the Commodity Futures Trading Commission(“CFTC”) and the Securities and Exchange Commission (“SEC” and collectively, the“Commissions”) to the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues(the “Committee”) regarding the market events of May 6, 2010.
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This report builds upon the initial analyses of May 6 performed by the staffs of theCommissions and released in the May 18, 2010, public report entitled
Preliminary Findings Regarding the Market Events of May 6, 2010 – Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues
(the “Preliminary Report”).
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Readers areencouraged to review the Preliminary Report for important background discussions andanalyses that are referenced but not repeated herein.
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This report is being provided on request to the U.S. Senate Committee on Banking, Housing, and UrbanAffairs, U.S. Senate Committee on Agriculture, Nutrition and Forestry, and the House Committee onFinancial Services. The Committees specifically requested that the report include information relating to thebusiness transactions or market positions of any person that is necessary for a complete and accuratedescription of the May 6 crash and its causes. Pursuant to these requests and section 8(e) of the CommodityExchange Act, this report contains certain information regarding business transactions and positions of individual persons.
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