By Vicki Needham - 05/19/10 12:25 AM EDT
SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler are expected testify before the Senate Banking Committee on Thursday.
"We have found no evidence that these events were triggered by 'fat finger' errors, computer hacking or terrorist activity, although we cannot completely rule out these possibilities," the report said.
Today's report outlined six theories:
1. Possible linkage between the precipitous drop in prices of stock index products such as Exchange-Traded Funds (ETFs) and E-mini S&P 500 futures, the simultaneous and subsequent waves of selling in individual securities and the extent to which the activity in one market may have led the others.
2. A generalized severe mismatch in liquidity, possibly exacerbated by the withdrawal of liquidity by electronic market makers and the use of market orders, including automated stop-loss market orders designed to protect gains in recent market advances.
3. Liquidity mismatch may have been exacerbated by disparate trading conventions among various exchanges, slowing trading in one venue while it remained normal in another.
4. The need to examine the use of "stub quotes" that are meant to technically meet a requirement to provide a "two-sided quote" but are at such low or high prices that they are not intended to be executed.
5. The use of market orders, stop-loss market orders and stop-loss limit orders that, when coupled with sharp declines in prices in equity and futures markets, might have contributed to market instability and a temporary breakdown in orderly trading.
6. The impact of the ETFs, which had a more disproportionate number of broken trades relative to other securities.
To see a copy of the CFTC-SEC report to the advisory panel, click here.