US market plunge puts spotlight on futures trading

US securities regulators have yet to come to any hard conclusions about the cause of last Thursday's lightning-fast plunge in US stock prices.

But the Securities and Exchange Commission and other agencies continue to focus a good a deal of attention on the trading in a popular futures contract that is linked to the Standard & Poor's 500 index, said people familiar with the investigation and several securities industry employees.

One thing regulators are looking into is the impact trading in the e-Mini future contract had on some of the underlying stocks in the S&P 500, said these sources. The e-Mini is a widely traded futures contract popular with hedge funds and high-speed trading firms.

Some traders use the e-Mini as part of an arbitrage strategy that tries to capture the change in prices between the futures contract and a basket of underlying stocks that make-up the S&P 500, said several futures traders. This strategy, sometimes referred to as an e-Mini leadlag trade, is popular with some high-frequency trading firms.

High-frequency firms are ones that rely on algorithimic-driven trading strategies to move quickly in and out of stocks and options. Many on Wall Street and on Capitol Hill are blaming automated trading strategies such as HFT for exacerbating the market plunge.

Regulators and exchange officials are combing over trading records for the e-Mini, an investment product created by CME Group Inc as a trading alternative to the standard S&P contract.

The CME and US Commodity Futures Trading Commission both have been requesting information related to e-Mini trading during the mysterious 15-minute stock plunge that resulted in the biggest intraday drop in the Dow Jones Industrials.

"We are getting regulators coming by and asking for data, which is out of the ordinary," said one trader who requested anonymity because he was not authorized to speak to the media.

A CME spokesman, who would not confirm the e-Mini information request, said exchange officials are cooperating with regulators.

Meanwhile, regulators are making some progress in ruling out the causes for the market sell-off.

So far, regulators have yet to find any evidence the wave of uncontrolled selling was sparked by a trader trying to manipulate stock prices, said several people who declined to be identified because the investigation is still ongoing. 

Regulators also pretty much have discounted an initial theory that the plunge began with a trader submitting an erroneous stock trade to one of the US exchanges.