Fixes large and small debated after flash crash
Securities regulators on Wednesday said they are moving forward with technical fixes in the wake of the still-unexplained May flash crash, but some market players say they want a more wholesale review of high-speed trading.
A regulatory advisory committee is still probing exactly what went wrong during the May 6 crash that sent the stock market plunging 700 points within minutes, and is weighing adjustments that aim to prevent a repeat.
The committee, a joint effort between the Securities and Exchange Commission and the Commodity Futures Trading Commission, on Wednesday brought together money managers, brokers, and academics to get their views on what happened and how to fix it.
We believe a more fundamental consideration is warranted, and this is whether the current market structure has become too focused on the speed of execution over all other factors, said Kevin Cronin, director of equity trading at big money manager Invesco Ltd. At some point, we believe that speed and price discovery have an inverse relationship, and this dynamic needs to be well-understood.
So far, the SEC is taking a more targeted approach to their reforms.
SEC Chairman Mary Schapiro on Wednesday listed some technical areas that may yet need rule changes, including the use of market orders, stub quotes, price collars, and self-help rules used by the dozen U.S. exchanges where today's high-speed trading is done.
The agency is determining whether to deter or regulate stub quotes, in which market makers quote well off the public price of stocks, and placing collars on market orders to keep them relatively close to a reference price.
The SEC has already reacted to the crash with new trading pauses for stocks and other proposals.
Schapiro said the process of breaking thousands of erroneous trades after the crash was neither clear nor transparent and has created uncertainty for investors about how such trades would be handled in the future. The SEC has proposed clear rules for trade-breaking.
Although exchanges canceled thousands of trades after markets closed, the crash brought steep losses to some.
Cronin told the committee that the prospect of trade breaking likely exacerbated the plunge that afternoon.
REPORT DUE NEXT MONTH
In early September, regulatory staff will issue a follow-up report on the crash, CFTC Chairman Gary Gensler said. The advisory committee will consider the report and make recommendations, perhaps this autumn, he said.
Regulators and exchanges have thus far pointed to a rare alignment of events that day in the high-speed, electronic marketplace in which stocks, futures and exchange-traded funds trade simultaneously on dozens of venues at record volumes.
Disparate exchange rules, a lack of liquidity and market jitters over Europe's escalating debt crisis are believed to have played a role in the flash crash, prompting a handful of new rules including market-wide circuit breakers for stocks.
Trading volumes have dropped precipitously from the record highs reached in May. Worries have grown that whipsawed investors, particularly individuals, have retreated from the sharp volatility.
Charles Rotblut, vice president of the American Association of Individual Investors, said one of the flash crash's biggest impacts was on investor confidence.
In a further reflection of the fallout, Goldman Sachs this week noted the flash crash as a factor in why it had 10 days of trading losses in the second quarter.
In the first quarter, Goldman hit trading perfection by reporting trading gains of at least $25 million every day.
(Reporting by Jonathan Spicer and Robert Rampton; Editing by Derek Caney, Maureen Bavdek and Gunna Dickson)
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