On May 20, CME Group’s Executive Chairman, Terry Duffy, joined regulators and other exchanges in testifying before the U.S. Senate Banking Committee’s Securities Subcommittee about the events of May 6.  Neither CFTC Chairman Gensler nor SEC Chairman Schapiro identified any “smoking gun” that was the cause of the market drop; the regulators and panelists agreed that the likely causes of the market volatility that day were a confluence of many factors, including macroeconomic conditions and macro and micro market structure issues. 

While clarity with respect to the specific causes remains elusive, one thing is clear- CME Group’s markets operated properly.  Mr. Duffy noted that while our markets worked, an appropriate and clearly defined rule set which is transparent to market participants and consistent across all markets must be in place to avoid future market disruptions.  As he put it, “Harmonization and clarity of rules is essential.”

One of the recommendations set forth by Mr. Duffy is the use of Stop Logic functionality, which under certain market circumstances temporarily pauses the markets for 5 to 20 seconds, allowing market participants the opportunity to provide additional liquidity and permitting the market to regain its equilibrium. 

The Stop Logic functionality helps to mitigate artificial market spikes that can occur because of the continuous triggering, election and trading of stop orders.   On CME Globex, if elected stop orders would result in execution prices that exceed pre-defined thresholds, the market automatically enters a very brief reserve state. During this period, new orders are accepted but trades do not occur until the reserve state expires, thereby providing an opportunity for the market to source needed liquidity.  The automatic implementation of the CME Group Stop Logic functionality halted the market’s decline, allowed liquidity to come into the market, and, following the 5 second pause, CME Group’s E-mini S&P contract led the subsequent rally in the broader market.

“I think the Stop Logic functionality that the CME Group has put in place…it clearly worked,” said Mr. Duffy.  “The charts don’t lie. The numbers don’t lie.”  He spoke more about how the exchange’s systems and protocols work on Fox Business, which can be found on CME Group’s homepage, www.cmegroup.com.  

Members of both panels credited the Stop Logic functionality with halting the market’s decline, observing the recovery of both the futures and, shortly thereafter, the cash markets  following implementation of this functionality.   

CFTC Chairman Gary Gensler noted during the question and answer session that the market “started to move back up after that pause.”  He added, the pause in trading at CME Group “was coincident that the market in that contract moved up at the end of it” and that seconds later the broad market exchange traded fund started going up as well as the cash markets.

Mr. Duffy agreed with those recommendations in the joint CFTC-SEC report on the events of May 6 seeking harmonization of circuit breakers across all futures and equity markets and the re-evaluation of existing circuit breaker parameters.  He noted that these steps, along with the adoption of Stop Logic type functionality in the cash equity markets, would improve the efficiency of the markets during times of severe stress.

Linda Rich is managing director of government relations and legislative affairs at CME Group