CME CME Group Inc

By Alexander Osipovich 

A sharp move in stock-market futures that fueled the Dec. 7 buying in U.S. equities likely reflected trading by multiple buyers, said a market-data firm that shared its analysis with The Wall Street Journal, a shift from its prior conclusion -- published by the Journal -- that a single buyer was behind the move.

The firm, MayStreet LLC, said its initial analysis, which characterized the event as a single $1.8 billion trade with one unknown buyer behind it, was based on a misunderstanding of how CME Group Inc. reports its raw data. Chicago-based CME is the exchange where the contracts involved in the Dec. 7 event are traded.

MayStreet now says "there are multiple indicators that this was not a single large order," according to a statement MayStreet emailed to the Journal. Instead, it appears that more than 300 orders to buy futures went off simultaneously as the market reached a key threshold, the firm said.

The shifting interpretation of the buying spree in E-mini S&P 500 futures shows the difficulty of understanding complex events in today's fast-moving electronic markets. The May 2010 "Flash Crash," in which regulators say the same contract played a key role, was also the subject of conflicting early reports about its causes and continues to be debated more than six years later.

E-mini contracts are used by traders to bet on or hedge against future moves in the S&P 500 stock-market index, and large moves in the price of E-minis can have knock-on effects in the equity market.

At 1:21 p.m. New York time on Dec. 7, about 16,000 of the contracts were purchased at the same time, CME data shows. MayStreet had previously said the 16,000 contracts were likely part of one trade, which The Wall Street Journal reported on Dec. 12. MayStreet's new analysis suggests the event was triggered by more than 300 stop orders in the contract placed at levels between 2,225 and 2,228 points. Stop orders can be used to buy or sell futures when the market reaches a certain level, according to CME rules.

The E-mini purchases all had the same nanosecond timestamp and ID number, indicating they were part of the same "event," the data shows. That initially made it appear they were all part of one large transaction, a conclusion that appeared in both MayStreet's first analysis and the Journal's Dec. 12 article.

But a far more likely explanation was that the event was a cascading series of stop orders executed together, MayStreet said in an updated analysis shared with the Journal several days after the article published.

The firm changed its view after being contacted by the Modern Markets Initiative, a New York-based advocacy group for high-frequency trading -- or HFT -- firms, which carried out its own analysis of the Dec. 7 event and concluded it was caused by multiple stop orders.

MayStreet said it stands by its conclusion that the move was the largest event to occur at a single point in time in E-minis in 2016, with a total of $1.8 billion worth of the contracts snapped up at once. "It doesn't take away the fact that it was an anomaly and the biggest event of the year," MayStreet co-founder Michael Lehr said.

It is not publicly known how many traders or which ones placed the orders that caused the event. The identities of traders behind orders are only available to CME. A spokeswoman for the exchange said in an email that CME could not discuss "the specifics of any particular trade(s)."

It is conceivable that one entity entered all the orders, but MayStreet said that was extremely unlikely because of the sheer volume of the purchasing and the fact that many of the orders were for small sizes, as little as one contract each. That makes it more likely that many traders placed the stop orders without knowing that others were doing the same thing, MayStreet said.

It is also unclear why, if MayStreet's new analysis is correct, so many stop orders were placed at the 2,225 level or just above it. The level was an intraday high and reflected a historical record in the S&P 500 at the time.

Some traders have speculated that the flurry of futures-buying reflected hedging to cover losses on stock-market derivatives trades as the market rose too high. Other observers have suggested the buying was part of a "breakout" strategy, in which traders jump into a market that has just moved sharply higher or lower after a period of being range-bound.

As of Dec. 6, at least two analysts had their year-end targets for the S&P 500 at 2,225, according to Birinyi Associates.

MayStreet's updated analysis matches the conclusions of MMI. MMI undertook its own study of the Dec. 7 event to deter potential suggestions that it was caused by a rogue algorithm or ultrafast trading run amok.

MMI Chief Executive Bill Harts said the "craziest" aspect of the event was that the apparent chain reaction of stop orders began with a small trade, the purchase of just one E-mini contract at 2,225, according to CME's data. "That's an eye-popping amount of trading in a very short time and occurred without any automated trading or HFT," Mr. Harts said.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

(END) Dow Jones Newswires

December 23, 2016 15:22 ET (20:22 GMT)

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