Market Makers and the 'Flash Crash'

Open for debate is whether professional liquidity providers should stay in down markets

As regulators continue to sift through evidence from the May 6 equity market “flash crash,” some of the focus has turned to the role played by providers of liquidity, including professional traders and market makers.

While it has been established that liquidity providers stepped away from the market on the afternoon of May 6, the question becomes, should they have done so? Do liquidity providers have any obligation to the broader market that supersedes their own economic self-interest?

Salient quotes from the full story include:

“It's clear from the events of May 6 that a lot of firms stepped away from the market,” said Rob Hegarty, managing director of market structure at Depository Trust & Clearing. “The rules are to keep fair and more orderly markets but there are no obligations.”

“Perhaps what made things worse might have been liquidity providers such as a class within the high-frequency trading community that pulled the plug on their activity,” said Matt Rowley, head of quantitative trading at Cheuvreux. “If true, this would highlight an interesting point that they provide a useful function in significant liquidity provision, although of no help in times of acute market stress.”

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