On Aug. 5, Senator Ted Kaufman, a Democrat from Delaware, submitted a list of nine regulatory recommendations to the Securities and Exchange Commission to address what he called “serious flaws” in the structure of the U.S. equity markets. Kaufman specifically urged the SEC to create an “effective regulatory regime” for high-frequency traders. This should include finalizing its large trader tagging and consolidated audit trail proposals, requiring high-frequency traders to certify that their algorithms do not manipulate market prices, issuing guidance on the types of trading patterns that would constitute unlawful manipulation, and imposing “liquidity provision obligations” on high frequency traders.

On Aug. 11, Senator Charles Schumer, a Democrat from New York, wrote a letter to SEC Chairman Mary Schapiro urging the agency to impose market maker obligations on high-frequency traders. Schumer outlined several specific conditions for such obligations, but noted that the SEC also should consider “appropriate incentives for high-frequency traders to become market makers given the cost of these obligations.

On Aug. 24, Representatives Spencer Bachus, a Republican from Alabama, and Jeb Hensarling, a Republican from Texas, sent a joint letter to Schapiro protesting the “ad-hoc” nature of SEC rule-makings in this area and urging the agency to rely on “economic and empirical market data, not political pressure,” in determining how to respond to changes in market structure. The two lawmakers, who sit on the House Financial Services Committee, asked Schapiro to provide the SEC’s analysis of the costs and benefits of several proposed rules and urged the agency to consider the potential impact on liquidity providers.
Click Here for Kaufman Letter
Click Here for Schumer Letter
Click Here for Bachus and Hensarling Letter

CFTC staff concentrated on activity in stock index futures. Both volume and volatility in the CME’s E-mini S&P 500 futures were much higher than normal on May 6. Volume that day was 2.6 times above the average level and the fifth highest in five years, according to the CFTC staff presentation. The price range that day was 112.75 points, the second highest range in five years. Between 2:30 and 3:00 p.m., the short window of time in which the market turmoil was at its peak, volume in the E-mini contract was 10 times the average level.

During that half-hour period on May 6, bid-offer spreads widened and market depth decreased notably on the buy-side of the order book, the CFTC staff said. Although bid-offer spreads quickly returned to normal levels after CME triggered its stop logic functionality at 2:45 p.m., the depth of the market—as measured by the number of bids and offers five-deep in the order book—was much lower than before.

The CME’s stop logic functionality is designed to stop a cascade of stop loss orders from causing an excessive downward spike in prices. When the stop logic is triggered, the market goes into a five-second pause that allows new orders to be submitted to the exchange and matched against the stop loss orders that are awaiting execution. CME officials have explained that this functionality brings additional liquidity into the market and permits the market to regain its equilibrium.

Click Here for Staff Presentation on May 6 Findings
Click Here for Joint Meeting Webcast

Click Here for Joint Announcement

Click here for the statement