New leads in the cause of 'flash crash'

The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, D.C.

TEXT OF INTERVIEW

BILL RADKE: Federal regulators are still looking into the causes of the so-called flash crash, back in May. Remember that -- when the stock market plunged momentarily. The Dow down 1,000 points and then was right back up? Well, today we've learned the Securities and Exchange Commission has some possible new leads in the case. Marketplace's Jeremy Hobson joins us now live from our New York Bureau with more. Hi Jeremy.

JEREMY HOBSON: Hi Bill.

RADKE: What is the SEC's latest suspect?

HOBSON: Well, according to a story in this morning's Wall Street Journal, regulators are looking into a practice called "quote stuffing," which is basically when high speed traders place a whole bunch of orders one second and then cancel all of them the next. They may be trying to psych out their competitors or they may simply be testing the market price of certain stocks. The other practice that the SEC is reportedly looking into is called sub-penny pricing. And with that, traders are placing big orders for stocks at a price that's just a fraction of a cent from the price at which the stock is actually trading. Just to get a tiny discount, which of course matters when you're buying in bulk.

RADKE: Well Jeremy, I'm enjoying the names -- quote stuffing and sub-penny pricing. But why might these practices might have caused the flash crash?

HOBSON: Well a company called Nanex recently came to regulators with some data comparing the flash crash to other mini flash crashes with particular stocks. The head of Nanex says in both cases, the same thing happened. High-frequency traders clogged up the system with a ton of orders, which slows down the information that the public is getting on stock trading action just by a matter of milliseconds which is just enough time, he says, for these traders to get a competitive advantage -- buy in low and sell high. Now Bill, of course, when it comes to the SEC's inquiry into all of this, it's not going to be a matter of milliseconds. But rather a matter of months.

RADKE: Amazing stuff. Marketplace's Jeremy Hobson in New York, thank you.

HOBSON: Thanks, Bill.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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