Sudden stock crashes usually caused by human error, SEC says

Concern that American stock markets have become more susceptible to split-second crashes due to computerization isn’t supported by the data, a Securities and Exchange Commission official said.

Most “mini-flash crashes,” a term sometimes applied when an individual U.S. stock briefly surges or plunges for no obvious reason, are the result of human errors, not broken software, said Gregg Berman, head of the SEC’s Office of Analytics and Research.

Scrutiny of market disruptions increased in the wake of malfunctions including the flash crash of May 2010, when the Dow Jones Industrial Average fell almost 1,000 points in minutes before rebounding. In September, the Senate Subcommittee on Securities, Insurance and Investment held hearings on the impact of computerized trading amid concern algorithmic and high- frequency strategies are contributing to investor uncertainty.

“A popular meme has emerged that, taken collectively, sudden price spikes indicate a broken market” and may be harbingers of another crash like the one in 2010, Berman said in New York today at a conference sponsored by the Securities Industry and Financial Markets Association. Critics who blame everything on electronic trading “may be looking in the wrong place,” he said.

Princeton Physicist

SEC staff found that swings in individual stocks are more often caused by human mistakes such as “fat finger” trades -- when a person enters the wrong number of shares to trade or some other typographical error -- or incorrectly entered limit orders, Berman said. While the errors reflect sloppiness and highlight a lack of checks, they can be fixed by better risk management and oversight, he said.

Berman, who trained as a physicist at Princeton University, was appointed to his SEC post in January. He joined the agency in 2009 from RiskMetrics Group and led the development of Midas, the SEC’s system for examining the U.S. stock market.

Sudden stock swings have spurred fluctuations in the paper value of some of America’s biggest companies. On May 17, shares of Anadarko Petroleum Corp., which had a market value of $45 billion at the time, briefly plunged 99 percent in the final minute of trading. Most of the transactions were later voided.

A week later, NYSE Euronext let stand trades that sent American Electric Power Co. and NextEra Energy Inc. down at least 54%, while labeling them “aberrant” and excluding them from records showing the stocks’ lows of the day.

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