CME Group Chairman Terry Duffy delivered the below testimony before the U.S. House Commitee on Financial Services regarding the May 6 intraday 1,000-point drop in the Dow. Duffy details the events that led up to and followed the plunge, as well as how well CME Group markets functioned during the turmoil.
I am Terrence A. Duffy, executive chairman of CME Group Inc. Thank you Chairman Kanjorski and Ranking Member Garrett for inviting us to testify today. You asked us to discuss issues surrounding the activity in the equity markets on Thursday, May 6, 2010, including our thoughts on market integrity and how our markets functioned on that date, the effectiveness of the existing market structure rules and the role of technology in our markets.
CME Group is the world’s largest and most diverse derivatives marketplace. We are the parent of four separate regulated exchanges, including Chicago Mercantile Exchange Inc. (“CME”), the Board of Trade of the City of Chicago, Inc. (“CBOT”), the New York Mercantile Exchange, Inc. (“NYMEX”) and the Commodity Exchange, Inc. (“COMEX”). The CME Group Exchanges offer the widest range of benchmark products available across all major asset classes, including futures and options on futures based on interest rates, equity indexes, foreign exchange, energy, metals, agricultural commodities, and alternative investment products. The CME Group Exchanges serve the hedging, risk management and trading needs of our global customer base by facilitating transactions through the CME Globex® electronic trading platform, our open outcry trading facilities in New York and Chicago, as well as through privately negotiated CME ClearPort transactions.
The equity index futures contracts traded on CME Group designated contract markets provide an essential risk management function, allowing investors to hedge their exposure against a portfolio of shares or equity options. The most significant equity index futures contract traded on the CME Group Exchanges is the E-mini S&P 500 futures contract. In 2009, average daily volume for the E-mini S&P 500 futures contract was 2,207,596 contracts.
Over the past four days, CME Group has engaged in a detailed analysis regarding trading activity in its markets on Thursday, May 6, 2010. Our preliminary review indicates that our markets functioned properly. We have identified no trading activity that appeared to be erroneous or contributed to the break in the cash equity market during this period. Moreover, no market participant in our markets reported that trades were executed in error nor did the CME Exchanges cancel (“bust”) or re-price any transactions as a result of the activity on May 6th.
In the following sections, we discuss: (1) the functioning of our markets on May 6, 2010, (2) the market dynamics in the futures market vis a vis the equity market, and (3) the relevant applicable CME and NYSE circuit breaker rules and (4) CME electronic functionality, particularly CME stop price logic functionality and price banding, among others, which serve to protect our markets. Finally, we have also included preliminary recommendations as to changes that could avoid a recurrence of this type of event in the future.
II. The CME Markets Functioned Properly on May 6, 2010
a. CME Has Conducted an Initial Review of Detailed Trading Records
CME Group analyzed trading volume and activity throughout May 6 and focused particularly on the activity taking place during the period of 1pm to 2pm Central Time. Total volume in the June E-mini S&P futures on May 6th was 5.7 million contracts, with approximately 1.6 million or 28% transacted during the period from 1pm to 2pm Central Time. During that hour, the market traded in a range of 1143.75 to 1056, or 87.75 points - beginning the hour at approximately 1142 and ending the hour at approximately 1113. More than 250 firms and 9,000 User IDs were active in the market during this period of time.
During most of that hour, the bid/ask spread was a tick wide (.25 points) and the market traded in a largely orderly manner despite the significant sell off and subsequent rally. At approximately 1:45:28, following a sharp 12.75 point decline over a period of approximately 500 milliseconds on the sale of 1100 contracts by multiple market participants, the bid/ask spread momentarily widened to 6.5 points or 26 ticks.
At that point, one of CME Globex’s risk management functionalities, a CME Globex Stop Price Logic event, which is discussed in more detail below, was triggered. As a result, the market was automatically paused for five seconds to allow liquidity to come into the market. The market subsequently reopened and was 1056.50 bid, at 1056.75 offered, and thereafter rallied more than 40 points to 1097 in the following three minutes.
The Market Regulation Department reviewed a significant amount of activity during this period, a period that included more than 3 million system messages, and, in particular, reviewed the activity of entities whose trading activity during the one-hour period was significant and thus warranted further review. Market Regulation staff ultimately concluded that there were no anomalies represented by the level of activity or the trading strategies employed by market participants.