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At 2:45p.m. on Thursday, May 6, George (Gus) Sauter
received a frantic call from one of his traders to get in front
of a Bloomberg terminal. The Dow Jones industrial average,
already down 3.9 percent that day on fears about Greece, was in
free fall. In just five minutes the index plunged 573 points.
Less than two minutes later, the Dow had rocketed back up 543
points, going on to finish the day down 3.2 percent.
"It was just crazy," Sauter, chief investment officer of
mutual fund giant Vanguard Group, told me a few days later. "I
had to go to our fixed-income building, about a five-minute
walk from my office. By the time I got there, the market had
Crazy, indeed. The aptly named "flash crash"
temporarily wiped out more than a half trillion dollars in
equity value, shaking what little faith nervous investors had
in U.S. markets. Shares of Dow component Procter & Gamble
Co., the ultimate defensive blue-chip stock, dropped more than
one third in a matter of minutes before recovering almost as
quickly, all for no apparent reason. A few other large U.S.
companies, including accounting firm Accenture, saw their
stocks trade as low as a penny a share, only to close not far
from where they had begun the day (nearly $42 a share in the
case of Accenture) — again, on no news. By the time
the dust settled, a whopping 19.3 billion shares had changed
hands, more than twice the average daily U.S. equity market
volume this year and the second-biggest trading day ever.
But for me, the single most amazing fact about the flash crash
was that no one had a clue as to what had triggered it. Not
that I should have been surprised, based on the conversation
I’d had two days earlier with Mary Schapiro,
chairman of the Securities and Exchange Commission. Schapiro,
whose organization is charged with maintaining "fair and
orderly" markets, explained to me how the SEC did a detailed
study after the October 1987 crash to reconstruct what had
happened. "We’ve lost some of the capacity to do
that given the dramatic volumes of trading that exist today,"
Schapiro said. "But we need to be able to do that to understand
where are the vulnerabilities in our marketplace and what are
the practices that have the potential to hurt investors and the
marketplace in the long run."
In 1987 the SEC had a much easier task because the vast
majority of listed U.S. equities were traded in one place
— on the floor of the New York Stock Exchange, where
specialists employed by the Big Board’s member
firms made a market based on an open-outcry auction system.
Today, as a result of a series of regulatory changes designed
to increase competition and make the market fairer for
mom-and-pop investors, only about one quarter of all U.S.
equity trading occurs through the now publicly held NYSE
Euronext. And the majority of that trading is done
electronically, either by the new NYSE floor specialists,
called designated market makers, or on the fully automated NYSE
Arca platform. The rest of the trading in U.S. equities is
spread across a wide range of venues, including the three other
major exchanges (Nasdaq Stock Market, BATS Exchange and Direct
Edge) and dozens of broker-dealer-operated trading systems,
electronic communications networks (ECNs) and dark pools, where
buyers and sellers are matched up anonymously.