| NEW YORK, June 18
NEW YORK, June 18 Unexplained rapid price drops
in single stocks have generally been triggered by human error,
not nefarious trading activity or high-speed trading algorithms
gone wild, an official at the U.S. Securities and Exchange
Commission said on Tuesday.
Last month trades in American Electric Power Inc and
NextEra Energy Inc plunged more than 50 percent in the
first minute of trading. Days earlier trades in Anadarko
Petroleum Corp were canceled after a trading blip
briefly cut the company's market value by 99 percent. And in
April, shares of Symantec Corp fell 10 percent in just
seconds before being halted.
These rapid price drops are some of the latest examples of
"mini flash crashes," named in reference to the May 6, 2010,
"flash crash" when $1 trillion in shareholder equity was briefly
wiped out of the market in a matter of minutes.
A popular narrative has emerged that these incidents are
symptomatic of a broken market where high-speed traders run
amok, but the evidence shows that is not the case, said Greg
Berman, associate director of the office of analytics and
research in the SEC's Division of Trading and Markets.
"What we are seeing is the result of sloppiness, combined
with a lack of checks and balances," Berman said at a Securities
Industry and Financial Markets Association conference. "In this
day and age, there should be no excuse for these types of
mistakes, especially considering the significant negative impact
that these events have on investor confidence."
Most rapid price spikes are caused by old fashioned human
mistakes, such as "fat finger" errors, where a trader may
accidentally add an extra zero to an order, or by portfolio
managers accidentally requesting a large order be immediately
executed rather than meted out in a managed flow, Berman said.
"Contrary to public speculation, these types of events do
not seem to triggered by proprietary high-speed algorithms, by
robots gone wild, or by excessive order cancellations."
Berman heads up a new initiative at the SEC that analyzes
market data using a platform launched in January called Market
Information Data Analytics System, or MIDAS, which was developed
by Red Bank, New Jersey-based automated trading firm Tradeworx.
MIDAS gives the SEC access to all orders posted on the
national exchanges, including modifications, cancellations and
trade executions of those orders, as well as all off-exchange
executions, putting the regulator on even footing with the most
sophisticated high-speed trading firms.
Traditionally when a problem in the market has needed to be
investigated, the SEC has gone to the exchanges, the Financial
Industry Regulatory Authority, and the firm that introduced the
error, to diagnose the cause. But MIDAS allows the regulator to
do its own assessment as well.
The SEC has found that high-frequency trading tactics have
not caused or amplified the mini flash crashes it has examined,
To help address human errors, the SEC introduced a "market
access" rule in 2010, which says broker dealers with direct
access to the markets must have risk management controls and
supervisory procedures in place to prevent erroneous orders that
they or their customers may send.
The regulator has also proposed a rule, which calls for
market centers to establish, maintain and enforce strict
policies and procedures to ensure their technology systems have
the security and other elements to maintain operational
capabilities and promote fair and orderly markets.
"With the use of technology comes the responsibility to have
systems ... that are working as intended," Berman said.