By David Gaffen and Jennifer Ablan
NEW YORK/TOKYO Dec 21 U.S. stock index futures fell sharply after a Republican proposal for averting the "fiscal cliff" failed to muster enough support on Thursday, raising concerns lawmakers won't be able to come to a deal, putting the world's largest economy at risk of recession.
S&P 500 E-Mini stock futures plunged on the news in a matter of seconds - falling as much as 3.6 percent in a mini "flash crash" that even caused a halt in trading of one March E-Mini futures contract because of the sharp move.
The market rebounded from there, but futures were still down 1.5 percent by 0400 GMT Friday. Dow Jones stock futures dropped 1.6 percent and Nasdaq futures were down 1.5 percent.
"This is happening on the evening before the last day of the week -- ahead of the weekend. There is a lot of complacency in the market -- as many, attracted to the favorable 'action' became too comfortable over the last few weeks," said Doug Kass, founder of hedge fund Seabreeze Partners Management Inc. in Palm Beach, Florida.
The S&P 500 closed Thursday at 1,443.69, just a few points off a two-month high, driven largely by optimism that Washington lawmakers would find a way to avoid a series of $600 billion in spending cuts and tax hikes set to begin in 2013.
Late Thursday, House of Representatives Speaker John Boehner conceded that his tax bill proposal to help avert the "fiscal cliff" lacked the votes to pass, leaving only 11 days for politicians to come to a deal.
Trading in S&P E-Mini futures, the most popularly traded futures contract on CME, spiked as the news broke and as orders flooded into the market.
The move lower included a drop of 15 points in the March E-Mini futures from 1,407 to 1,392 in less than one second, according to Thomson Reuters time-and-sales data. That caused a halt in trading of 10 seconds before trading resumed.
Futures trading resumed shortly after as orders came back into the system. A CME representative was not available for comment.
"It basically stops trading if an order comes in that will clear out the orders resting in the book," said Eric Hunsader, founder of trading software and technology firm Nanex, who maintains a blog where he posts frequently on sudden, computer-driven moves in markets.
The cuts were designed to hit in a matter of months, rather than over years, and it is estimated that this compressed set of actions will hit U.S. growth hard.
"It's a confidence denter as this is happening at the important end of Christmas sales period -- it's not a positive for Christmas sales activity. Investors should look for downgrades to first-quarter GDP forecasts. Another risk short-term is that this event could accelerate tax selling," Kass said.
The bill, had it passed, would have put Republicans on record as supporting a tax increase on those who earn more than $1 million per year, breaking with decades of orthodoxy. It won the blessing of influential anti-tax activist Grover Norquist, but other conservative groups fiercely opposed it and many rank-and-file members said they would not support it.
The Boehner proposal was not expected to pass the Democratic-held Senate and did not have White House support, but the fact that the proposal could not even win passage among Republicans suggests it will be difficult to agree on a bill that comes closer to President Barack Obama's demands.
President Obama wants to raise taxes on families earning more than $400,000, a much lower threshold.
"The effect on markets will entirely be determined by the length of time this persists," said Dan Greenhaus, chief global strategist at BTIG LLC in New York.
"Markets in particular, and the economy in general, probably won't care all that much if this is just posturing and a deal is eventually reached. But if we stretch into mid-January, it's hard to image there won't be effects."