“More advanced logic to address message traffic and short term price movements may have allowed detection of the ‘hot potato’ volume situation referenced in the report, where HFTs traded more volume than usual with each other and could have signalled abnormal market conditions,” she said. “If the algorithms contributing to the problem on May 6 had been more sensitive to market conditions and aware of the type of volume being traded, they would likely not have been so aggressive.” Commenting on why the futures markets retained order while the stock markets crashed, Crosthwait said market structure prevented equity stocks from recovering in the “orderly manner that the futures did”.

The CME had Stop Logic functionality which forced market participants to take a 5-second pause after a certain degree of price movement, and this pause gave ample time for market participants to consider their positions. Without circuit breakers in individual stocks and because the lateness of the day prevented market-wide circuit breakers from triggering, there was nothing to stem the tide of falling equity prices in these order-driven markets, Crosthwait said. As a potential remedy, the single-stock circuit breaker pilot program may be a positive initiative to address the issues seen on May 6. Regulators also need to recognise the correlations between markets and asset classes so they can co-ordinate preventive measures.

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