NEW YORK (Reuters) - 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 (AEP.N) and NextEra Energy Inc (NEE.N) plunged more than 50 percent in the first minute of trading. Days earlier trades in Anadarko Petroleum Corp (APC.N) were canceled after a trading blip briefly cut the company’s market value by 99 percent. And in April, shares of Symantec Corp (SYMC.O) 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, Berman said.
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.
Reporting by John McCrank; additional reporting by Herb Lash; Editing by Kenneth Barry