An over-reliance on computer systems and high-frequency trading were the biggest contributors to the 6 May flash crash that saw a dizzying plunge in the Dow Jones Industrial Average, according to a poll of retail financial advisors.
The poll of 380 US advisors by Market Strategies International for BlackRock's iShares, shows 23% of respondents cite over-reliance on computer systems as a contributor to the crash.
A further 19% think high-frequency trading was a factor and 10% a technical glitch. Only 11% cite human error by traders or broker/dealers, ahead of the use of orders to sell at "market" and "stop loss" orders at nine per cent.
Testifying at a regulatory hearing on the crash hosted by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), Noel Archard, MD, BlackRock, warned that most of those surveyed think a repeat of the 6 May mayhem is likely to occur, "no matter what solutions are adopted".
Also speaking at the hearing, Pamela Craig, chief financial office, Accenture, warned "there is every reason to expect that this can happen again". The tech firm was one of the worst hit by the crash, seeing its stock price fall from $41.01 to one cent and back again between 2.40pm and 3.00pm.
Craig blames what was "seemingly a 'perfect storm' of economic news around the globe, a reduction of liquidity in many securities, unusual trading volumes and some technology challenges".
Technology and HFT were also highlighted as a cause for concern by Charles Rotblut, VP, American Association of Individual Investors. He told the hearing that individual investors "wonder about how much control over the movement of stock prices has been ceded to complex software programs that trade within milliseconds".
CFTC commissioner Bart Chilton also slammed a reliance on technology, insisting "computer trading added to the volatility and that without this technology, the number of trades simply would not have occurred. The downward spiral of nearly 1,000 points would not have taken place, nor would the rapid rebound to a loss of 348 points have occurred."
Chiltern highlighted problems posed by having two different data feeds - the consolidated one open to everyone and premium ones direct from exchanges. He says the consolidated feed was over 20 seconds behind premium ones during the 20 minute flash crash.
This means that, hypothetically, an algorithmic program could buy at the lower price from the Nyse feed and immediately sell on another exchange portal using the delayed consolidated one.
Since the crash, the SEC has introduced circuit breaker rules, requiring trading in a Standard & Poor's 500 stock to pause for five minutes if its price changes by more than 10%.
Christopher Nagy, MD, order routing strategy at TD Ameritrade, told the hearing that this is a "good first step" in the battle to prevent a future crash but says regulators also need to look at dark pools, flash orders, access fees, high frequency trading and naked access.
Laying out his recommendations, Archard called for uniform circuit breakers for stocks and ETFs across all exchanges, less "arbitrary" exchange trade error cancellation rules, clearer guidelines for inter-market order routing rules, the replacement of "stop loss" orders with "stop loss limit" orders to specify a limit price, and an expanded role for lead market makers to ensure orderly market functioning.
SEC and CFTC staff are due to deliver a follow-up report on the crash in September.
You can read opening statements from participants in the hearing and the iShares study here.