As a doctoral candidate in physics two decades ago, Gregg E. Berman spent most of his time in a laboratory searching through subatomic data for an elusive particle called the heavy neutrino. Today, from his office at the Securities and Exchange Commission, the former physicist is supervising a team of more than 20 investigators who have spent the last five months scrutinizing stock-trading data interview transcripts in an effort to figure out why stock prices went into free fall for 20 terrifying minutes on May 6th.
“What everybody would love to hear from the SEC is that XYZ trader blew up the market and made a gazillion dollars and is now in jail.”
Mr. Berman (44) will not say exactly what will be in the report, but he says that it will not simply restate what regulators have already said — that markets were volatile because of worries over the debt crisis in Europe, causing some computerized trading programs to stop trading, and finally causing computers on other exchanges to misread the pullback as a rapid bidding down of stock prices.
Instead, he says, the report will focus on a specific sequence of events that preceded the crash.
He says it will tell a clear story about what happened in the markets on that stomach-churning day, beyond simply pointing a finger at the perils of the kind of high-speed computer trading that dominates today’s markets.
“The report will clearly demonstrate how market conditions and events prior to the flash crash led to the extreme price moves.”
When pressed, he adds, notably, that he had found no evidence of a deliberate attempt by anybody to disrupt markets.
The implications of the report are not merely academic.
Ordinary investors, shaken by the brief stock plunge and the lack of an official explanation, have withdrawn money from stock mutual funds every week since the crash.
Market analysts say investors want to be reassured about the integrity of the nation’s markets so they can be confident that a nose dive will not happen again.
The Berman report will not be the final word on the matter. Its findings will be used by a group of advisers to the S.E.C. and the commodity futures commission, which will make policy recommendations.
Still, some analysts question whether the report can deliver a simple answer that will satisfy everyone eager for reassurance.
“What everybody would love to hear from the S.E.C. is XYZ trader blew up the market and made a gazillion dollars and is now in jail,” says Larry Tabb, chief executive of the Tabb Group, a specialist on the markets.
“The answer, I think, is much more complicated and nuanced and has to do with a lot of different things. I am not sure that everybody outside the industry is going to have the patience to understand that.”
Mr. Berman acknowledges that his team’s explanation will involve a number of things happening at once.
It may strike many people as painfully complex, but that is an undeniable result of the byzantine nature of today’s disparate electronic markets and the many players who take part in them.
The report’s conclusions will involve “market participants doing very different things and for very, very different reasons,” Berman says.
Central to all of this is the fact that stock trading is no longer centralized but instead takes place on dozens of exchanges, all with varying policies and procedures.
For example, the New York Stock Exchange has circuit breakers that prevent stocks from rising or falling so quickly that they disrupt the broader market.
Trading was slowed on several listings on that exchange on May 6, while other markets kept trading lower.
That lack of coordination created confusion during the flash crash.
Since then, the SEC has extended circuit breakers for individual stocks across all markets.
In investigating the crash, Mr. Berman says he finds himself in a position similar to his physics work 20 years ago, when he was collecting huge amounts of data and comparing the competing views of many laboratories on a question dividing particle physics — whether the neutrino, one of the least known and most common elementary particles, actually had mass.
Today he finds himself in familiar territory, sifting through huge amounts of messy and disjointed data, and at the same time reading blogs and e-mails from a wide range of observers, each with a theory about what happened on May 6th.
Related by The Swapper:
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- Tighter rules for market makers post-‘flash crash’ (financialpost.com)
- Flash crash remains a mystery (financialpost.com)
- TABB Group Says Confidence Level in US Equity Market Structure is Highly Polarized Across the Marketplace since the May 6 Market Crash (eon.businesswire.com)
- Three months on, impact of ‘flash crash’ probed (reuters.com)