An overreliance on computer systems and high-frequency trading were the primary drivers that contributed to the extreme market volatility on May 6, 2010, a BlackRock survey of advisors finds. Also known as the “Flash Crash,” secondary contributors cited by advisors included the use of stop-loss orders, the support of market makers and questions with exchange routing rules.
Commissioned by the iShares Exchange Traded Funds business and conducted by Market Strategies International, the survey also indicated that most advisors’ accounts were not impacted by the events.
Advisors are encouraged with the initial recommendations by the SEC to make the needed changes to market structure. The single-stock circuit breaker rule proposed by the SEC is one of the primary solutions advisors endorse to address the causes of the May 6th market decline. Advisors surveyed also favor clearer inter-market routing guidelines to rectify market structure problems and feel strongly towards placing trading audits and expanding the role of the lead market maker.
“The findings of the financial advisor survey around May 6th are noteworthy because they indicate that advisors believe that market structure issues were at the root of the ‘Flash Crash’ and that the initial recommendations made by regulators to fix structural market problems are a step in the right direction,” said Rob Stone, Ph.D., Executive Vice President at Market Strategies International, in a statement. “In addition, advisors’ market sentiment leans towards the view of continued or increased market volatility and, despite the ‘Flash Crash,’ advisors state that they will use ETFs most often in uncertain markets.”
As it relates to the macroeconomic environment, the majority of advisors surveyed expect current market volatility will either increase or remain at today’s level over the next six months. Furthermore, those surveyed anticipate an event similar to May 6th will likely occur again, no matter what solutions are adopted. Regardless of the cause — economic or structural like the “Flash Crash” — advisors identified ETFs as the best investment vehicles to navigate a volatile market environment followed by bonds and mutual funds.