SIFMA: comparing corona crisis market functioning to the 2010 flash crash

What was different this time around with the Covid-19 related market turmoil? The Securities Industry and Financial Markets Association looked at a roughly 30-day time period around each event: flash crash from April 15 to May 28, 2010; Covid-19 from March 2 to April 14, 2020.

SIFMA first looked at how volatility differed across the two events. The average VIX during Covid-19 was 2x that of the flash crash (54.22 versus 26.79). In fact, the March 16, 2020 peak of 82.69 represents a historical high for the VIX. The flash crash peak was 45.79. Covid-19 volatility came in hard and remained elevated for longer.

The impact on index prices differed as well. Looking at intraday price movements (high minus low price), Covid-19 has a higher maximum single-day swing in the DJIA, 1,904 versus 1,010, and on average intraday swings were almost 5x that seen in the flash crash. The S&P 500 index saw similar stats, albeit at lower levels of intraday moves: maximum 219 under Covid-19 versus 102 in the Flash Crash; the Covid-19 average was around 5x larger. The Nasdaq moves were more exaggerated, 6.7x greater swings on average for Covid-19 than with the Flash Crash (peak 657 versus 222). The Russell 2000, home to smaller market cap stocks, was essentially out of the flash crash turmoil, with a peak intraday swing of 63. It was hit harder under Covid-19, peaking at 140 (3.5x greater on average).

What is also different during the Covid-19 related market turmoil, is that the plumbing of the system has and continues to hold up. Despite greater volatility and price impact, markets remain open and fully functioning, with no exchange experiencing an outage during the peak of the turmoil in March (ADV 15.6 billion shares, average VIX 57.74). Data feeds did not display delays, maintaining the functioning of the price discovery process. MWCBs (market wide circuit breakers) were triggered four times to address market volatility. The Securities and Exchange Commission mandated the formation of MWCBs to prevent a repeat of the October 1987 Black Monday crash, where the DJIA fell ~22%. MWCBs have only been triggered once since 1997…until March 2020.

The S&P 500 triggered a Level 1 MWCB during the opening hour on March 9, 12 and 16; the MWCB tripped midday on March 18. (Note: trading also halts on the DJIA and the Nasdaq Composite when a circuit breaker is triggered on the S&P 500.) While there are varying opinions on circuit breakers among market participants, they worked in March, allowing trading to resume efficiently after the trading halt ceased.

Technological improvements over the last decade and regulatory reforms such as Reg SCI are among some of the reasons exchanges are handling the Covid-19 market turmoil so well. That said, given significant changes with the closure of the NYSE, Cboe and other options trading floors, some institutional orders remain unfilled at the close on the NYSE and more options trades are being printed in the OTC market since the trades are too complex to execute in an electronic market. The NYSE also brought in DMMs to manually open recent secondary offerings and IPOs.

Overall, SIFMA still views this as Markets 1: Virus 0. (knock on wood)

Read the full summary (with report link)

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