PrefBlog

Gensler’s testimony regarding the May 6 Bungee Jump is available:

CME Globex has stop logic functionaility that protects against cascading stop orders – the domino effect of one stop order triggering others. Globex’s stop logic functionality pauses trading for five to ten secons – five seconds in the case of the E-Mini contract – when the trading engine recognizes that it has a series of resting stop orders that could lead to a cascade and move the market up or down beyond a specified amount. On May 6, the stop logic functionality occurred on two currency futures contracts and when the E-Mini contract hit bottom.
…
On May 6, trading volume was very high. Usually, high volume indicates high liquidity. On this day, however, high volume could have been a misleading indicator of liquidty to market participants and their pre-programmed algorithms. Higher trading volume, when it is associated with high price change, may not be a good indicator of liquidity because many orders could have been executed at falling prices. This particular high trading volume was accompanied by significant fluctuations in trading volume. Further, the daily trading activity did not result in a significant number of futures contracts held by market participants at the end of May 6. This implies many investors participated in the market intraday, but on balance few investors increased their positions by the close of trading.
…
The two other measures of liquidity we reviewed – the bid offer spread and the depth of the limit order book – suggest that liquidity was dislocated. When the CME’s stop logic functionality took effect on the E-Mini contract, the bid ask spread had widened significantly. This means the liquidity was lower and the transaction costs were higher.

Click for big

Click for big

One of the top ten most active trading accounts by gross volume between 2:00pm and 3:00pm only entered orders to sell. That trader entered the market at around 2:32pm and finished trading at roughly 2:51pm. The trader sold just less than half of its contracts as the market went down and just more than half as the price level rose.

We understand that this particular market participant sought to hedge its stock portfolio in the futures market by selling a pre-determined amount of futures through an executing broker’s automated execution system. In this circumstance, we further understand that the trade was executed through an executing broker’s algorithm that was meant to limit market impact by limiting volume at an average of nine percent of the volume traded during the period.
…
From 2:30 pm to 3:00 pm, however, this market had 10 times higher volume than the average daily trading volume for the same intraday time period over the previous month, without the concurrent increase in liquidity. On May 6, it took about 21 minutes for the participant to execute their sell order. In markets with average volume, it would have taken significantly longer – perhaps hours.

The Canadian preferred share market had a day of low volume, especially when compared with levels of the past two months. Sell in May and pay and pay? PerpetualDiscounts were up 2bp and FixedResets gained 6bp.

This entry was posted on Saturday, May 22nd, 2010 at 12:05 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.