A "Flash Crash" that can cause individual stocks to lose more than 90% of their value in 10 seconds remains a looming risk to capital markets, according to the chief financial officer of Accenture, the global consultant.
"Based on what we've all witnessed in the markets that day and since then, there is every reason to expect that this can happen again," Accenture Chief Financial Officer Pamela J. Craig told the Joint Advisory Committee of the Securities and Exchange Commission and the Commodity Futures Trading Commission Wednesday.
Her company's stock was possibly the most brutally affected by the events of May 6. This is a stock with $29 billion of market worth. Except, in one 10-second period, it went down to $6.4 million, if you priced all its 636.5 million outstanding shares at the one-cent price that prevailed for that brief interlude.
Before the crash, shares traded at $41.01. At the end of the day, $41.09. But in between was a hair-raiser.
At 2:40 p.m., the stock was trading at $41.01 a share. But in a small window of 10 seconds 19 trades of 100 shares eachwere executed at a penny each.
She attributed the plunge to "a seemingly perfect storm of economic news around the globe, a reduction of liquidity in many securities, unusual trading volumes and some technology challenges."
Craig called for "clear, coordinated and consistently applied" rules across all exchanges, to head off a repeat of "a seemingly perfect storm of economic news around the globe, a reduction of liquidity in many securities, unusual trading volumes and some technology challenges."
Why consistency? Because all the penny trades took place off the New York Stock Exchange. The NYSE had slowed trading in its shares and never carried out a trade below $38.75. But other markets did not follow suit. Trading was unbridled.
SEC Chairman Mary L. Schapiro says the SEC is considering steps beyond the single-stock circuit breakers that it is pilot testing with the major exchanges. Price collars, where trading stops if a price moves more than 3 percent or so from the previous price, are one option. Single-day limits up or down are another. Five-second trade pauses, as occur on CME Group's Globex platform, are another.
But if nothing else, stub quotes-where penny orders sit out there waiting for market failure to occur-are due for elimination. In electronic trading, there are far better ways to maintain markets. Automatically.
And preserve the value of stocks and the confidence of investors, in the process.