"Flash Crash" Report

http://www.usatoday.com/money/markets/2010-10-04-flashcrash04_ST_N.htm

NEW YORK — Government regulators' detailed account of how a big, computer-generated sell program by a mutual fund firm caused a stock market crash in a matter of minutes in May is unlikely to be enough to restore investors' shaken confidence, Wall Street experts say.

The reason for the lukewarm response to the report on the May 6 "flash crash," released Friday by the Securities and Exchange Commission and Commodity Futures Trading Commission, is that it focuses solely on answering one question: What happened?

What the report doesn't do: outline a plan to fix the market's structural flaws. The omission was glaring, as investors' mistrust of the market remains high.

"The problem is what they didn't tell the public," says Joe Saluzzi of Themis Trading. Investors wanted to hear, 'We're going to recommend these steps so May 6 won't happen again.' But we didn't get that."

The report has been given to the Joint Advisory Committee on Emerging Regulatory Issues, a panel charged with coming up with recommendations to fix the glitches and with rules to govern traditional exchanges and electronic trading platforms.

"We now must consider what other investor-focused measures are needed to ensure that our markets are fair, efficient and resilient," SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler said in a statement. No timetable was given for the panel to issue its recommendations.

Analysts criticized the SEC and CFTC for taking five months to issue a diagnosis of why the market went haywire without also including how to fix it. The report detailed the fallout — loss of liquidity, a computer-driven domino selling effect, massive mispricing of stocks — caused by a large sell trade of futures contracts that mimic trading in the S&P 500 index. The trade was executed "extremely rapidly," using a computer algorithm. "I'm not sure this report does much to placate investors," says Larry Tabb, CEO of Tabb Group.

In defense of the regulators, the report wasn't touted as a policy document. And it did point out some of the steps already taken to remedy some problems — such as single-stock circuit breakers that stop trading for five minutes after a stock falls 10% in a five-minute span — will help dampen volatility and reduce the odds of another flash crash.

But analysts say you can't rule out another flash crash, at least right now. "Can it happen again? Absolutely," Saluzzi says.