White Paper

Oct 26, 2015 • White Papers

Managing Market Structure Risk: Flash Back

DTCC Commissions TABB Group Report on US Equity Market

Five years after the May 6th Flash Crash, market infrastructure risk has become as important as market structure risk, according to a new TABB Group report commissioned by DTCC and launched today titled, “Managing Market Structure Risk: Flash Back”. With average daily trades for the first eight months of 2015 versus the same period in 2005 increasing to 31.6 million trades from 10 million, the US equity national market system’s stability is as tied to market structure as it is to market infrastructure.

“The benefits of trading automation can be severely diminished without effective risk controls, leading to unintended malfunctions,” says Sayena Mostowfi, a TABB principal and head of equities research who wrote the report, which first recaps the most significant system disruptions since 2010, including the Flash Crash, Facebook IPO, and Knight Capital failures. It then summarizes regulatory and industry actions since the Flash Crash; and, identifying seven key topics, recommends 13 areas for improvement.

Although industry regulators and market participants have put in place some effective safeguards, there are gaps that can be addressed through uniformity across safeguard rules (reference price calculations) and exchange functionalities (risk monitoring/detection, kill switches), while other gaps would benefit from consolidation and integration of existing tools, such as the DTCC centralized limit monitor and exchange kill switches. However, for uniformity and consolidation to be feasible, there needs to be further reconciliation and mapping of market participant IDs and trade and clearing files across all venues.

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