With the May 6th 'flash crash' of 14 days ago melting into the past, regulators are still investigating the causes, while pilot 5-minute circuit breakers were announced a few days ago. CNBC's Bob Pisani cornered Joe Mecane, EVP and co-head of cash markets at the New York Stock Exchange on the NYSE floor yesterday to get his reaction to the pilot-5-minute circuit breakers and the SEC-CFTC's draft report on what caused the market's sudden dive of nearly 1,000 points.Under the pilot, if individual stock prices drop 10 percent in five minutes, the circuit breakers will kick in. But "is this the palliative the markets are looking for?" asked Pisani. Mecane said the pilot circuit breakers "are a good first step. It's important to point out, it's a pilot, so we'll tweak it."
In response to why the SEC chose five minutes as opposed to two minutes, Mecane said, "Firms need enough time to react to the pause getting invoked, aggregate their orders and figure out what direction they want to go in."
Mecane emphasized the circuit breakers are market-wide and will impact "all exchanges, dark pools and internalization systems, so trading basically stops for five minutes." Part of what allegedly caused the sudden decline is the way that other electronic markets continued to trade while the NYSE shifted into slow mode to involve humans to manage the trading in falling stocks. Pisani commented, that people question why exchange traded funds (ETFs) are not included in the circuit breakers, noted Pisani After all, in e-mini S&P 500 futures contracts was linked to volatile behavior in the stock market on May 6th. Mecane said in the video interview, Meacane suggested ETFs would be included in the future. "The idea is to launch quickly," he said, noting that the S&P was an easy basket to start with, but the pilot was not meant to be limited to that alone.
Waving the 151-page draft report from the SEC and CFTC, Pisani pressed Mecane to react to the causes of the flash crash. Based on the report, they include disparate trading conventions and more sell than buy-orders. "It actually says that," exclaimed Pisani, as if that was too simplistic a reason for regulators to blame. "While there is always a search for one silver bullet, I really don't think it's that simple," said Mecane. "The fact is that we have very correlated assets, we have nanosecond responses, we have fragmented liquidity and there's times when that liquidity doesn't join fluidly and tie together. May 6th was good example of that," reasoned Mecane.
Meanwhile, the NYSE has decided to keep its own internal circuit breakers- known as Liquidity Replenishment Points or LRPs. "We think they added stability to the market on May 6th," said Mecane, adding, "We think the 10 percent circuit breakers leave room for our internal LRPs to add value in a typical trading environment." In the end, the market is still waiting for a final report from securities and futures market regulators. Regulators are focusing on as many as six hypotheses that contributed to the flash crash, according to a Dow Jones report. In the future, both the SEC and CFTC plan to conduct a joint study on linkages between correlated assets in the equities options and futures markets.
In a CNBC video, Joe Mecane, NYSE EVP reacts to the pilot-5-minute circuit breakers and the SEC-CFTC's draft report on what caused the flash crash. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio