One of our recurring activities over the past few years was, in collaboration with Nanex, to point out the countless mini-flash crashes that take place almost on a daily basis across the equity market. Although not as dramatic as the far more popular major flash crashes of May 2010 or August 2015, these recurring events merely served to underscore just how broken and fragment the market plagued by HFTs has become.
And while the HFT lobby was quick to point out that mini flash crashes do not really take place and it is all just a fabrication by the "anti-HFT crusaders", moments ago the SEC validated our previous observations, when it announced that Merrill Lynch has agreed to pay a $12.5 million penalty for unleashing at least 15 mini flash crashes between 2012 and 2014, as a result of maintaining "ineffective trading controls that failed to prevent erroneous orders from being sent to the markets."
An SEC investigation found that Merrill Lynch caused market disruptions on at least 15 occasions from late 2012 to mid-2014 and violated the Market Access Rule because its internal controls in place to prevent erroneous trading orders were set at levels so high that it rendered them ineffective. For example, Merrill Lynch applied a limit of 5 million shares per order for one stock that only traded around 79,000 shares per day. Other trading strategies had limits set as high as 25 million shares, which Merrill Lynch reduced to 50,000 shares after the SEC’s investigation began.
According to the SEC’s order instituting a settled administrative proceeding, the erroneous orders that passed through Merrill Lynch’s internal controls caused certain stock prices to plummet and then suddenly recover within seconds. Among the mini-flash crashes were 99-percent drops in the stocks of Anadarko Petroleum Corporation on May 17, 2013, and Qualys Inc. on April 25, 2013. Another order led to a nearly 3-percent decline in Google’s stock in less than a second on April 22, 2013.
We vividly recall the Anadarko flash crash, prominent featured in a blog post on May 17, 2013 titled "How A Last Second Flash Crash Pushed The S&P 500 From 1,667 To 1,666."
“Mini-flash crashes, such as those caused by Merrill Lynch, can undermine investor confidence in the markets,” said Andrew Ceresney, Director of the SEC Enforcement Division. “It is essential that broker-dealers with market access have reasonable controls to prevent erroneous orders that disrupt trading.”
What investor confidence? What markets? Between HFTs and central banks, neither exists any more.
Robert Cohen, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit, added, “This is the highest-ever SEC penalty for violations of the Market Access Rule. Despite multiple red flags, Merrill Lynch failed to evaluate adequately whether its controls were reasonably designed and failed to fix the problems quickly.”
Considering that $12.5 million is a fraction of the profits the BofA trade desk generated with these forced "stop hunts", which is what ultimately these trading practices were, we are certain that absolutely nothing will change and that "mini" flash crashes will continue further "undermining investor confidence in the market", especially since the next crash will have to be blamed on HFTs to deflect anger and attention from the true culprit: central banks.