Trading practices under review as part of ‘flash crash’ probe

6 September 2010

Trading practices are being reviewed as part of the investigation into the ‘flash crash’ which hit the markets in May of this year.

The Securities and Exchange Commission and Commodity Futures Trading Commission (CFTC), which are jointly behind the review, are examining different trading patterns in a bid to discover the cause of the crash.

On May 6th, the Dow Jones industrial average index fell by 9.2 per cent over a 20 minute period during the so-called 'flash crash'.

High-frequency trading practices including quote stuffing, which involves a trader making, then quickly cancelling an order to either buy or sell shares, have been the subject of the investigation.

Scott O'Malia, commissioner for the CFTC, told Reuters: “If traders are flooding the market with orders with the intention of slowing other traders down, then we should consider addressing this under new disruptive trading practices authority.”

“I don't see how quote stuffing as a trading practice benefits futures markets,” he added.

Mr O’Malia, who was quoted by the Financial Times, also said that investigators “must look beyond the traditional pit trading enforcement rules and adapt our oversight and enforcement capabilities to a wide range of computer trading behaviour to ensure futures markets continue to provide price discovery and hedging function”.

Spencer Bachus and Jeb Hensarling, two US Republicans, recently warned regulators against blaming the record-breaking dip in the index on high frequency traders.

By Jim Ottewill

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