Factbox: SEC examines market sell-off trigger theories

(BestGrowthStock) – Top securities regulator Mary Schapiro said on Tuesday her agency is still unable to pinpoint a single event as the sole cause of the May 6 dramatic market sell-off.

Schapiro, chairman of the U.S. Securities and Exchange Commission, said in prepared testimony to be delivered to a House panel that the SEC is still sifting through 17 million trades in listed equities.

Despite the lack of conclusions, Schapiro addressed some of the most common theories that have circulated about what triggered last week’s 20-minute market roller coaster.

Below are excerpts from her testimony:


There have been reports in the press about a “fat-finger” error where, it is hypothesized, an order of billions of shares was entered, rather than an intended order of millions of shares. While we cannot yet definitely rule that possibility out, neither our review nor reviews by the relevant exchanges and market participants have uncovered such an error.


In addition, there have been reports that one or more exceptionally large orders in the stock of Procter & Gamble may have preceded and helped to trigger the broader market decline. There does not appear to have been any prior unusual trading in Procter & Gamble that would have triggered the broader market decline.


Another focus has been the role of the E-mini S&P 500 future in leading the market decline and recovery. To a great extent, this concern merely reflects a basic fact of market dynamics — much of the price discovery for the broader stock market occurs in the futures markets. Those who believe that the broader market is overpriced (or underpriced) often will first sell (buy) futures for a broad market index rather than sell (buy) the individual stocks that make up that index.

Moreover, many arbitrage traders study the relationship between futures prices and stocks prices. If they see a decline (rise) in the price of the futures compared to the price of the stocks, they will sell (buy) the underlying stocks in expectation that the stock prices quickly will follow the futures price. Indeed, this type of activity helps assure that stock prices will closely follow futures prices up or down.

Accordingly, given that the E-mini S&P 500 futures price fell by more than 5 percent in a few minutes and then quickly recovered all of the 5 percent decline, it should be no surprise that the broader stock market indexes showed similarly fast and similarly large declines and recoveries. It must be recognized, however, that the fact that stocks prices follow futures prices chronologically does not demonstrate what may have triggered the price movements. The triggering factor may have been an event in the futures market (such as an exceptionally large order), but it could have as readily been events or anomalous activities in individual stocks that caused someone to trade first in the futures markets.


At this time, we have not identified any information consistent with computer hacker or terrorist activity. I would also note that staff from our Enforcement Division are fully integrated in our review of the events of May 6 and will recommend appropriate action if they identify any activity that violates the securities laws.

Stock Trading

Factbox: SEC examines market sell-off trigger theories