An overreliance on computer systems and high-frequency trading are seen by financial advisors as the primary drivers of the sharpest single-day point decline in Dow Jones history, according to a survey commissioned by the iShares Exchange Traded Funds (ETFs) business, conducted by Market Strategies International and released by BlackRock, the investment advisory firm.
Such "market structure issues" were the main drirvers of the" extreme market volatility on May 6th,'' according to the iShares survey.
Secondary contributors cited by advisers included the use of stop-loss orders, the support of market makers and questions with exchange routing rules. The survey also indicated that most advisers' accounts were not impacted by the events of May 6th.
In fact, the most common account impact was a stop-loss order triggered by the Flash Crash at a significantly reduced value, which happened to about a quarter of advisors, the survey released this week indicated.
"Advisers believe that market structure issues were at the root of the 'Flash Crash' and that the initial recommendations made by regulators to fix structural market problems are a step in the right direction," said Rob Stone, executive vice resident at Market Strategies International. "In addition, advisors' market sentiment leans towards the view of continued or increased market volatility and, despite the Flash Crash, advises state that they will use [exchange-traded funds] most often in uncertain markets."
According to the survey, advisers are encouraged with the initial recommendations by the SEC to change how markets work by instituting single-stock circuit breakers, for instnace. Advisers surveyed also favor clearer inter-market routing guidelines to rectify market structure problems and feel strongly towards placing trading audits and expanding the role of the lead market maker.
But the founder and former chief executive of the Arizona Stock Exchange, Steve Wunsch, laid the blame Tuesday squarely at the feet of the Securities and Exchange Commission itself -- for setting up the market structure that led to the crash.
He said the plunge was not kicked off by high-frequency trading or general computing foulups -- but more specifically, miscues in routing orders between exchanges. This he called a derivative of the move to more electronic trading and proliferating venues spurred on by Regulation National Market System aka Reg NMS, as promulgated three years ago by the SEC.
"earing those arguments repeated – and so passionately – should have made it obvious to anyone who participated in the rule’s vetting and rollout in 2007 that the fat finger explanation was no longer at the top of the list of probable causes for May 6, having been replaced by a simple Reg. NMS order-outing snafu.
"ut, curiously, this most likely of probable causes, which has only become more probable as inquiries into the event have proceeded, was never mentioned. And the illuminating arguments ceased almost as soon as they had begun, reportedly because SEC Chairman Mary Shapiro called Niederauer and Greifeld and the other exchange heads and told them to stop disagreeing in public.
"Instead the exchanges were told to come to Washington for emergency meetings with the SEC to get their story straight, which would be the SEC’s story, namely, that we don’t know what happened yet, we’ll keep looking for the culprit, but meantime we are going to implement single stock circuit breakers to make sure it doesn’t happen again."