By Vicki Needham - 05/11/10 08:40 PM EDT
Officials with the Securities and Exchange Commission and Commodity Futures Trading Commission said they are still trying to determine what caused markets to fall on Thursday. The Dow Jones Industrial average lost nearly 1,000 points before rebounding by hundreds of points.
It all took place within minutes, and explanations have run from a “fat finger” that hit the wrong button to other technologic issues.
So far, there's no evidence that the huge drop was caused by a finger error, computer hackers, terrorism or specific securities trading, Schapiro told the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.
Regulators are looking closely at the role of some professional liquidity providers that temporarily didn't participate on the market on the buy side as many stock prices declined sharply.
Schapiro said investigators believed they would eventually pinpoint the cause, but that it would take time.
The investigation will probably point to several factors behind the precipitous drop. Seventeen million trades in listed equities took place between 2 p.m. and 3 p.m., when markets fell dramatically. Conclusions from the probe could lead to changes in market regulation, Schapiro said.
It's highly probable that a “confluence of events exacerbated an already down day,” that led to the steep drop, she said.
The day started out turbulently with fears heightened about Greek debt and a European financial crisis, elections in the United Kingdom and a U.S. jobs report expected the next morning, all of which could've open the door to the drop, CFTC Chairman Gary Gensler said. Volatility pricing was up 60 percent and there were signals in the futures markets that caused risk premiums to widen, he said.
With all of those signals combined with additional external pressures on the markets, “fear took over,” Gensler said.
Regulators were in touch with the heads of the exchanges from the end of trading Thursday through the weekend, and then met in Washington on Monday.
“The sudden evaporation of meaningful prices for many major exchange-listed stocks in the middle of a trading day is unacceptable and clearly contrary to the vital policy objective of maintaining fair and orderly financial markets,” Schapiro said. “This event directly impacted the many who trade in the interval and undermined confidence in the integrity of the financial markets.”