CME Issues Statement On May 6 Flash Crash Report

CME Group Inc.(CME) on Friday defended the actions of a trader whose automated algorithm executed a large futures sell-order on May 6, saying the trades were "legitimate" and "consistent" with market practices.

CME issued a statement shortly after the Securities and Exchange Commission and the Commodity Futures Trading Commission released a joint report outlining the sequence of events on the day of the "flash crash."

The report said that the algorithm's sell order of 75,000 E-mini Standard & Poor's 500 futures contracts listed by CME led to rapid selling in an already unstable market that was worried about economic events in Europe. The sale of the contracts, valued at $4.1 billion, was completed in roughly 20 minutes instead of the five hours it would take in normal market volume conditions.

The exchange operator said it supports the work of regulators and advocated for some changes--particularly in cash securities markets. But the exchange also reiterated that its markets functioned correctly as did the trading algorithm targeted in the report.

"The prevailing market sentiment was evident well before these orders were placed, and the orders, as well as the manner in which they were entered, were both legitimate and consistent with market practices," CME said. "These hedging orders were entered in relatively small quantities and in a manner designed to dynamically adapt to market liquidity by participating in a target percentage of 9% of the volume executed in the market."

While market volume led the order to be completed in just 20 minutes, CME noted that "more than half of the participant's volume executed as the market rallied--not as the market declined."

CME went on to make several recommendations, including the elimination of stub quoting in cash equities markets in which orders can be executed at a penny or less of their true value.

CME also called for uniform standards to address erroneous trades, uniform price limit policies and a requirement to adopt procedures similar to those at CME which trigger brief trading pauses so liquidity can be restored.

The report on Friday credited CME's trading pause mechanism, known as stop logic functionality, for being effective on the day of the flash crash.

-By Sarah N. Lynch, Dow Jones Newswires; 202 862 6634; sarah.lynch@dowjones.com

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