Our initial takeaways:

1)      There were two crises in liquidity on May 6^th. The first started in the e-mini futures, and the second was the spillover into the equity markets.

2)      The crisis in the futures markets started with a large sell order that was executed by an algorithm, which accelerated selling by design as liquidity and bids diminished. It continued, and accelerated to the downside as HFT firms, who originally supplied liquidity by buying, turned around and became net sellers in a game of “hot potato”.

3)      The crisis spilled over into equities, as HFT intra-market arbitrageurs laid off risks in ETF’s and the equity markets.

4)      In the equity markets HF market makers who typically internalize order flow reversed that pattern and instead routed nearly all, if not all, equity orders to the public system, rather than take the risk internalizing.

5)      Differences in data feed speeds between the public tape and the co-located tapes may have exacerbated the issues and created a cycle of selling downwards.

6)      Differences in halt/slow-down practices also exacerbated the decline, as many market makers shut down due to the uncertainties surrounding:

1. The tape speed delays.
2. The lack of clarity on whether trades would be broken, and which ones.

The SEC is intent on the first line of defense being the circuit breaker program, perhaps modified with limit up/limit down collars.

They also go out of their way to state that “fair and orderly markets” require a standard for robust, accessible, and timely market data. Going forward an area of focus will likely be market centers’ data processes, especially those involving publishing trades and quotes to the public consolidated feeds.

We had anticipated in our previously released paper that the core of their fix would be coordinated circuit breakers with a limit up/limit down feature, and that is in fact where they are leaning in this report.  We see no mention at all of order cancellation fees,  addressing the validity of rebate maker/taker model, or fiduciary language. We see little language in the way of criticizing a system that involves fifty-plus destinations connected at insane speeds, with different speeds for the public information and the co-located bought-and-paid for information.

We see nothing outside the circuit breakers addressed meaningfully. We were hoping for more in the way of solutions, rather than just post-mortems. Having said that, we have faith in Chairman Schapiro, and realize that this must be the first step, and that we all must be patient. This is a report presented to the advisory committee; recommendations are to come from them.