Multiplying Markets

More than 19.3 billion shares changed hands in U.S. markets on May 6, compared with the daily average of 7.57 billion since then. While NYSE Euronext (NYX)'s three venues including the New York Stock Exchange give it the most business, electronic markets that didn't exist before the mid-2000s, such as Bats Global Markets in Kansas City, Missouri, and Jersey City, New Jersey- based Direct Edge Holdings LLC, handle about 20 percent.

A study by the SEC and CFTC on Oct. 1 concluded that an automated sale of stock index futures without regard to price and computer-driven trading strategies helped trigger the crash, turning an orderly selloff into a plunge as buy orders vanished. Disparate rules across exchanges and delays in the dissemination of trading data, especially for stocks listed on the New York Stock Exchange, sowed confusion, regulators said.

The crash highlighted the loss of dominance for the 219- year-old New York Stock Exchange and Nasdaq Stock Market, founded in 1971. Volume in securities they list has dropped from as much as 80 percent in the last decade to less than 30 percent now. Orders are dispersed to as many as 50 competing venues, almost all of them operated by computers that match orders electronically. Twenty years ago, fewer than 10 exchanges competed for equity trades.

Circuit Breakers

The exchanges and the Financial Industry Regulatory Authority, which oversees more than 4,500 brokers, worked with the SEC to introduce circuit breakers that halt trading in Standard & Poor's 500 Index and Russell 1000 Index (RIY) stocks along with more than 300 exchange-traded funds when prices rise or fall 10 percent in five minutes. The markets last month proposed moving to a so-called limit-up/limit-down mechanism that prevents trades outside a moving price band.

"Exchanges and regulators have done a lot over the last year. Stocks can't move as far out of whack as they could before," said James Angel, professor at Georgetown University in Washington, "Murphy's law hasn't been repealed. Anything that can go wrong will go wrong. We need safeguards for when the next event occurs."

Randy Snook, New York-based executive vice president at the Securities Industry and Financial Markets Association in Washington, said the circuit breakers and plans to move to a limit-up/limit-down system are an "important, necessary step to ensure we don't have, on a stock-by-stock basis, extremes in volatility." Consistency across exchanges and trading platforms are key to damping price anomalies, he said.

David Fuller's view The markets are man-made resources for us to harvest when the timing is right.

In our investment and trading efforts, we should assume that the market can actually do the seemingly impossible. Fortunately, rogue days such as May 6th 2010, although unsettling, are extremely rare and have little lasting impact on most portfolios. Leveraged traders are more exposed but those of us who were short futures a year ago profited from the 'flash crash'.

Life is uncertain but no less interesting as a consequence.