In Washington this week, Larry Leibowitz, the frank-talking chief operating officer at the NYSE’s parent company, offered up perhaps the most succinct explanation of what went wrong in the jarring May 6 market plunge. He offered it to a subcommittee of senators growing testy as the weeks tick by without anyone pinpointing what exactly caused the crash, so it may have drifted over a few heads. Just in case, here it is:
“While it would be comforting to know what the triggering cause of this was, I think it’s largely irrelevant. It’s like airport security — we all take our shoes off because someone happened to put a bomb in his shoes. We all wondered what would happen if someone put it in his pants. Then they did,” Leibowitz said, arguing that solutions, such as new stock-market circuit breakers in the works, should instead be the focus.
“We have to look at the factors that make up our market structure, which actually functioned very well on a normal day, but during times of stress sometimes doesn’t. What we have is a loosely coupled, fragmented market that’s very deep at the top of the book, but when the market moves through the top of that book very quickly, it’s not nearly as efficient as it was in the past.”
The “book” lists standing bids and offers at the fifty some exchanges and trading venues in the United States. Books have fattened out considerably over the last decade as trading went high-tech, high-speed, and mostly electronic. But most of that girth is at the “top of book” where orders are very close to the actual price of any given stock. That’s quite unlike the dusty books of the past, where flesh-and-blood floor specialists slowed trading way down — and didn’t worry about holes in their socks.