the 6 may 2010 cascading flash crash, page-2

Someone just put this on the general thread

SEC Probes Canceled Trades

Regulators Looking Into Role 'Quote Stuffing' May Have Played in Flash Crash

SEPTEMBER 1, 2010
Wall Street Journal

By TOM LAURICELLA And JENNY STRASBURG
Regulators are scrutinizing what some in the stock market are calling "quote stuffing," trading in which unusually large numbers of orders to buy or sell stocks are placed in a fraction of a second, only to be canceled almost immediately.

The Securities and Exchange Commission has begun looking into whether the practice is putting some investors at a disadvantage by distorting stock prices, according to people familiar with the matter. The SEC is looking at what role, if any, quote stuffing played in the May 6 "flash crash," when the Dow Jones Industrial Average collapsed 700 points in minutes, the people say.

Traders say the phenomenon of huge bursts of orders flooding stocks and then getting canceled has risen with the growth of high-speed computerized trading in recent years.

In addition, the SEC is looking into another practice in which large numbers of orders are placed. In these cases, what's unusual is that the orders are priced in increments as small as one-tenth of a cent and far away from the actual price at which a stock is trading, says a person familiar with the line of inquiry.

The SEC is seeking to learn whether such orders, known as "sub-penny pricing," are used to manipulate the market, this person says, which would be illegal. At issue is whether the practice could artificially torpedo stocks' prices or help make it appear that there is more trading volume in a stock than there really is, allowing sellers to profit when demand for the stock appears elevated. The agency has identified about half a dozen investment firms to question regarding "sub-penny" orders, this person says, and the inquiry is expected to take months to complete. The firms identified aren't necessarily suspected of wrongdoing, and it is unclear whether there will be a formal investigation. An SEC spokesman declined to comment on the inquiry.

These issues are among the latest to have emerged as stock trading has become dominated by super-fast computer systems used by hedge funds. At the same time, the once-clubby world of a handful of stock exchanges has evolved into many more decentralized, loosely connected, high-speed electronic trading networks.

The transformation of the stock market has some benefits for investors, of course, including some lower costs. And some say greater volume of canceled orders is a natural consequence of high-speed markets, where traders constantly troll across exchanges for the best price.