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Agenda 1. May 6 th General Market Context 2. Preliminary Findings a)securities b)futures 3. Initial Q&A 4. Next Steps and Analysis a)securities b)futures c) Joint 5. Closing Q&A Slide 2
General Market Context Economic News Uncertainties in Europe Higher CDS spreads Broad decline in U.S. equity market prior to 2 p.m. Higher volatility index Market News 10-year Treasury yield fell Price of gold rose from the open to the 1:30 p.m. close After 1:00 p.m., the Euro declined further against U.S. Dollar and the Japanese Yen Slide 3
Figures 2 & 3: CBOE SPX Volatility Index Daily and Intraday Levels Slide 4
Figure 4: Ten-Year U.S. Treasury Note Yield Slide 5
Figure 6: U.S. Dollar/Euro and Japanese Yen/Euro Exchange Rates on May 6, 2010 Slide 6
Afternoon of May 6 2:00 p.m. to 2:30 p.m. increase in liquidity replenishment points Existing market decline accelerated and implied volatility sharply increased Declarations of self help Dislocation of liquidity in E-mini S&P 500 futures contract Rebound begins with CME Stop Logic functionality Slide 7
Agenda 1. May 6 th General Market Context 2. Preliminary Findings a)securities b)futures 3. Initial Q&A 4. Next Steps and Analysis a)securities b)futures c) Joint 5. Closing Q&A Slide 8
Preliminary Findings* - Securities A. Market Impact B. Examples of Select Securities C. Broken Trades D. Exchange-Traded Funds E. Liquidity Issues * Based on initial data and subject to change Slide 9
The Securities Markets on May 6 th 2010 2:00-3:00 Slide 10
Summary of Major Index Moves Lows from Previous May 5 th Close (4:00pm) S&P 500 Index S&P 500 ETF DJIA Index E-Mini Futures 2:00-1.78% -1.81% -1.51% -1.78% 2:40-4.35% -4.45% -3.91% -4.43% 2:45-2:47-8.58% -10.12% -9.16% -9.18% 3:00-4.90% -5.05% -5.00% -5.12% 4:00-3.30% -3.37% -3.26% -3.48% Slide 11
May 6 th Lows for Individual Securities 0% -10% -20% -30% -40% -50% -60% -70% -80% -90% -100% Slide 12 Low Return from May 5th Close (%) 14:00 14:10 14:20 14:30 14:40 14:50 15:00 Stock B 14:44:56 S&P 500 Stock A 14:56:27
Distribution of Lows from 2:40 3:00 pm Total # trades Total volume Total volume ($) All trades 7,135,104 1,995,000,637 56,651,582,692 Losses 5,013,724 1,358,709,226 38,047,617,508 0% to -10% 4,912,125 1,324,448,213 37,383,122,363-10% to -20% 63,890 22,171,745 522,444,343-20% to 30% 12,923 4,077,881 85,328,519-30% to -40% 6,112 2,317,245 30,461,333-40% to -50% 2,519 767,393 9,641,261-50% to -60% 1,682 472,624 8,334,944-60% to -70% 1,056 370,920 4,328,898-70% to -80% 798 292,061 2,245,851-80% to -90% 1,109 237,259 1,152,480-90% to -100% 11,510 3,553,885 557,516 Slide 13
May 6 th Highs for Individual Securities 300% 250% 200% 150% 100% 50% 0% Slide 14 High Return from May 5th Close (%) 14:00 14:10 14:20 14:30 14:40 14:50 15:00 Sample ETF Others at $100,000
Preliminary Findings* - Securities A. Market Impact B. Examples of Select Securities C. Broken Trades D. Exchange-Traded Funds E. Liquidity Issues * Based on initial data and subject to change Slide 15
$60.00 $55.00 $50.00 $45.00 $40.00 $35.00 140 120 100 80 60 40 20 0 Slide 16 14:46:30 14:46:45 14:47:00 14:47:15 14:47:30 14:47:45 14:48:00 Volume (Thousands) Stock A: 90 Seconds of Trading Offers Bids
$45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 20 15 10 5 0 Slide 17 14:47:40 14:47:45 14:47:50 14:47:55 14:48:00 14:48:05 14:48:10 14:48:15 Volume (Thousands) Stock B: A 10-Second Bounce Offers Bids
Preliminary Findings* - Securities A. Market Impact B. Examples of Select Securities C. Broken Trades D. Exchange-Traded Funds E. Liquidity Issues * Based on initial data and subject to change Slide 18
Distribution of Lows from 2:40 3:00 pm Total # trades Total volume Total volume ($) All trades 7,135,104 1,995,000,637 56,651,582,692 Losses 5,013,724 1,358,709,226 38,047,617,508 0% to -10% 4,912,125 1,324,448,213 37,383,122,363-10% to -20% 63,890 22,171,745 522,444,343-20% to 30% 12,923 4,077,881 85,328,519-30% to -40% 6,112 2,317,245 30,461,333-40% to -50% 2,519 767,393 9,641,261-50% to -60% 1,682 472,624 8,334,944-60% to -70% 1,056 370,920 4,328,898-70% to -80% 798 292,061 2,245,851-80% to -90% 1,109 237,259 1,152,480-90% to -100% 11,510 3,553,885 557,516 Broken Trades Slide 19
Low-Priced Broken Trades over Time 12000 < 14:40 Price < $0.05 10000 43% of Broken Loss Trades were < $0.05 8000 6000 4000 2000 0 Before 2:40 2:40-2:45 2:45-2:50 2:50-2:55 2:55-3:00 After 3:00 Slide 20
Broken Trades and Short Sales 12000 < 14:40 Price < $0.05 10000 43% of Broken Loss Trades were < $0.05 8000 6000 4000 2000 0 Shorts Shorts Before 2:40 2:40-2:45 2:45-2:50 2:50-2:55 2:55-3:00 After 3:00 Short Sh. 70-90 % of Broken Trades < $0.05 are Shorts Slide 21
Securities with Broken Trades 326 Securities Affected Market Broken Total % Total % All Exchange-Traded Securities 7,878 100.0% 326 100.0% Primary Listing on NYSE 3,277 41.6% 56 17.2% Primary Listing on NASDAQ 2,946 37.4% 42 12.9% Primary Listing on ARCA 1,088 13.8% 225 69.0% Primary Listing on Amex 567 7.2% 3 0.9% Component of DJIA 30 0.4% 0 0.0% Component of S&P 500 500 6.3% 12 3.7% Component of Russell 2000 2,000 25.4% 30 9.2% Exchange-Traded Fund 838 10.6% 227 69.6% Almost 70% of Affected Securities are ETFs Slide 22
Preliminary Findings* - Securities A. Market Impact B. Examples of Select Securities C. Broken Trades D. Exchange-Traded Funds E. Liquidity Issues * Based on initial data and subject to change Slide 23
May 6 th Lows for Exchange-Traded Funds 0% 14:00 14:10 14:20 14:30 14:40 14:50 15:00-10% Low Return from May 5th Close (%) -20% -30% -40% -50% -60% -70% -80% 27% of ETFs had Broken Trades, most at stub quotes -90% -100% Slide 24
Asset Classes of ETFs with Broken Trades Broken ETFs and ETF Universe 90 80 70 60 50 40 Low proportion of bond ETFs were affected # ETFs Broken Total ETFs 30 20 10 0 Large Value Large Blend Bear Market Large Growth Equity Energy Foreign: Lg. Med, Sm Health Technology Financial Small Blend, Growth Mid-Cap Blend Mid-Cap Growth Mid-Cap Value Asia, Europe, Lat. Am. Consumer Discretionary Consumer Staples Industrials Small Value Utilities Communications Natural Res Diversified Emerging Mkts Long-Short Real Estate Intermediate Government World Bond Convertibles Slide 25
Sample Exchange Traded Fund $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 90 75 60 45 30 15 0 Slide 26 14:44 14:45 14:46 14:47 14:48 14:49 14:50 14:51 14:52 14:53 14:54 14:55 14:56 14:57 14:58 14:59 Volume (Thousands) S&P 500 Low Low Price = $0.15
Preliminary Findings* - Securities A. Market Impact B. Examples of Select Securities C. Broken Trades D. Exchange-Traded Funds E. Liquidity Issues * Based on initial data and subject to change Slide 27
Liquidity and Order Routing 1. NYSE Liquidity Replenishment Points (LRPs) 2. Self-Help Declarations against Arca Nasdaq: 2:37 Nasdaq OMXBX: 2:39 BATS: 2:49 NSX: 2:51 Slide 28
NYSE Liquidity Replenishment Points (LRP) May 6 th vs.2010 Average 1200 Number of Stocks with LRP Events > 1 Sec 1000 800 600 400 200 0 2010 Average May 6 th Peak on May 6 th 9:45 10:15 10:45 11:15 11:45 12:15 12:45 13:15 13:45 14:15 14:45 15:15 15:45 Mid-point to Half-Hour Intervals Slide 29
May 6 th Volume from 2:00 3:00 Volume Spikes During Market Decline S&P 500 Low Slide 30
Top 10 Liquidity Providers % Volume Provided/Taken Stays ~Constant Slide 31
Agenda 1. May 6 th General Market Context 2. Preliminary Findings a)securities b)futures 3. Initial Q&A 4. Next Steps and Analysis a)securities b)futures c) Joint 5. Closing Q&A Slide 32
Analysis of E-mini S&P 500 Futures on May 6 Liquidity Dislocation Market Volume and Price Movement Role of Liquidity Balance of Trading Slide 33
Liquidity Dislocation An imbalance of orders on the sell side resulted in prices falling. The depth of the order book declined, as prices fell. The price decline induced buyers to enter the market, coinciding with the CME Globex Stop Logic event. Slide 34
E-mini S&P 500 Futures Volume and Price Movement Higher than Normal Volume 2.6 times average volume 5 th highest daily volume in 5 years Spike in volume between 2:40 and 2:49 p.m. High Price Volatility Daily price range of 112.75 points 2 nd highest range in 5 years 59.75 point range between 2:40 and 2:49 p.m. Slide 35
Figure 29: CME E-mini S&P 500 Futures Trade Price and Volume Slide 36
Role of Liquidity Liquidity reflects ease of buying/selling without exerting a significant price impact Liquidity cannot be directly observed Three indicators of liquidity High volume may indicate more liquidity Narrow bid-offer spreads may indicate more liquidity Greater order book depth may indicate more liquidity Slide 37
Role of Liquidity High and Erratic Volume 10 times average volume between 2:30 and 3:00 p.m. Possible execution deep into the order book Widening of Bid-Offer Spreads Minimum bid-offer spreads prior to Stop Logic event Widening and variable spreads just prior to and following Stop Logic event Imbalance and Decrease in Market Depth Less market depth on buy side Overall decrease in market depth after 2:45 p.m. Return to relative balance in orders after 2:45 p.m. Slide 38
Figure 30: Price and Trading Volume in the June 2010 E-mini S&P 500 Futures Contract Slide 39
Figure 31: Bid/Offer Spread (in Ticks) and Price in the June 2010 E-mini S&P 500 Futures Contract Slide 40
Figure 32: Bid/Offer Quantities: 5th Best in the June 2010 E-mini S&P 500 Futures Contract Slide 41
CME Globex Stop Logic Functionality Designed to stop a cascade of stop loss orders. A cascade is one stop loss order triggering another. Market pauses to prevent a cascade greater than 6 points Triggered at 2:45:28 p.m. Reserve State Pauses Execution Five second hold Reserve State Exit Release if execution within 6 points, otherwise hold for additional 5 seconds Trading resumed at 2:45:33 p.m. Slide 42
Large Trader Analysis Buyer and Seller Transaction Volume Volume of 10 largest net sellers exceeds volume of 10 largest net buyers: 51,526 net buys vs. 72,186 net sells during 2:30-2:45 p.m. 49,180 net buys vs. 67,544 net sells during 2:46-3:00 p.m. Largest Net Seller Only entered orders to sell 9% of volume Position executed between 2:32 p.m. and 2:51 p.m. Slide 43
Large Trader Analysis Liquidity Provision Liquidity Providers (Active but Flat Positions) 2:30 to 3:00 p.m. review period Methodology to select providers of liquidity Six trading accounts 50% of early trading activity Decline of activity during volatile period Liquidity Takers (All Others: 4,573 accounts) Slide 44
Figure 33: Cumulative Volume of Transaction Sides of Liquidity Providers and Liquidity Takers in the June 2010 E-mini S&P 500 Futures Contract Slide 45
Summary of Findings CFTC Broad-based desire for investors to reduce exposure to risky assets Liquidity Dislocation Rise in volume during price decline Imbalance of sell and buy orders Reduction in depth of order book Triggering of Stop Logic functionality Return to balanced order book and tight bid-offer spread Slide 46
Agenda 1. May 6 th General Market Context 2. Preliminary Findings a)securities b)futures 3. Initial Q&A 4. Next Steps and Analysis a)securities b)futures c) Joint 5. Closing Q&A Slide 47
A Framework for Next Steps and Analyses External shock, signal, or change in perception Market Makers Retail Investors Institutional Investors Algorithmic Traders Cross-Market Linkages Creates New Signals Market 1 Market 2 Market 3 Inter-Market Feedback Slide 48
Topics for Further Research 1. Where did the downward price pressure originate? a) Price discovery, arbitrage and linkages between markets b) Short sales and directional algorithms c) Hedging existing holdings d) Liquidating positions 2. What happened to liquidity? a) Withdrawal of market makers, internalizers, highfrequency algorithms b) Trapped liquidity: Declaration of Self-Help, LRPs Slide 49
Topics for Further Research 3. What role did order types play? a) Market Orders, Stop Loss Orders, ISOs b) Stub Quotes 4. What explains the experience of ETFs? 5. Were there other contributing factors? Slide 50
Data Context Offer Books Orders To Sell Exchange Exchange Internalizer Broker Broker Asset Mgr Hedge Fund Retail Client Price National Best Offer National Best Bid Trades Bid Books Slide 51
Agenda 1. May 6 th General Market Context 2. Preliminary Findings a)securities b)futures 3. Initial Q&A 4. Next Steps and Analysis a)securities b)futures c)joint 5. Closing Q&A Slide 52
Further Analysis CFTC Review of special call on large traders and OTC swap dealers Review of trade-register data Review of electronic trading High Frequency trading Algorithmic trading Pre-trade automated safety features Slide 53
Further Analysis Joint Study the linkages between correlated assets in equities (single stocks, mutual funds and ETFs), options and futures markets Focus on cross-market linkages in stock index products Slide 54
Agenda 1. May 6 th General Market Context 2. Preliminary Findings a)securities b)futures 3. Initial Q&A 4. Next Steps and Analysis a)securities b)futures c) Joint 5. Closing Q&A Slide 55