Finding the Smoking Gun
May 12, 2010
The following is NYSE Euronext COO Larry Leibowitz's oral testimony from the Tuesday, May 11 hearing of the House Financial Services Committee's Subcommittee on Capital Markets.
Introduction
Chairman Kanjorski, Ranking Member Garrett and Members of the Subcommittee, my name is Larry Leibowitz and I am Chief Operating Officer of NYSE Euronext.
Thank you for the opportunity to be here today.
We commend the Subcommittee for your rapid response to the events of last Thursday. As you know, we have begun a dialogue with our regulators and other trading venues, and it has been very productive. We are committed to working with you and other market participants to restore confidence and enhance investor safeguards in the future.
Today I would like to discuss three things:
• First, the high-level causes of the events last Thursday;
• Second, clarifications about NYSE’s market model and how it worked; and
• Third, our recommendations going forward.
The Events of May 6th
It’s understandable that everyone is looking for a “smoking gun” behind last Thursday’s dip; however the circumstances are more complicated than that. I’ll leave it to the regulators to link the interactions of various markets, but from our standpoint we see no evidence of fat finger error or market manipulation. We also note that our markets
However, we do see the following:
• Elevated market activity coming from adverse European news, including a very large and broadly based wave of orders and quotes “at” around 2:30;
• A significant reduction in marketplace liquidity through the day which accelerated through the downturn; and
• Various microstructure issues that resulted in certain marketplaces not interacting with one another, which exacerbated the liquidity effect.
The NYSE's Market Model and Action on May 6
The NYSE has embraced electronic trading, and we believe our market model provides the best combination of cutting-edge technology with human judgment.
The NYSE Hybrid market rules expressly provide mechanisms to mitigate volatility and large price swings – which we have always believed is a critical piece of our offering to listed companies and their investors.
Specifically, the NYSE incorporates in our trading structure a type of circuit breaker mechanism, known as Liquidity Replenishment Points (“LRPs”), which temporarily and automatically pause trading in stocks when significant price movement occurs.
On a typical day, LRPs are triggered 100-200 times, for seconds at most, and during the recent financial crisis, served the market well.
Let me be clear: the LRP mechanism does not halt trading. Instead, for a short time, trading is automatically paused to facilitate more accurate price discovery and prevent the market from a sudden and significant move.
Our LRPs are analogous to taking the controls of a plane off auto-pilot during turbulence. This is not meant as a comment on other markets or other market models.
