'Flash crash' regulations under study
WASHINGTON — Regulators and market players still don't know exactly what caused the hair-raising "flash crash" on Wall Street but they've already come up with new rules they hope will avoid a repeat.
U.S. stock exchanges would briefly halt trading of some stocks that have big prices swings under the new trading rules proposed Tuesday that are aimed at avoiding market plunges like the one that stunned Wall Street on May 6.
The rules would take effect in mid-June under a six-month pilot program agreed to by major U.S. exchanges and the Securities and Exchange Commission.
Under the plan, trading of any Standard & Poor's 500 stock that rises or falls 10 percent or more within a five-minute span would be halted for five minutes. These rules, known as "circuit breakers," would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time. That's almost the entire trading day. On May 6, about 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes.
Importantly, the new circuit breakers would apply to all U.S. exchanges. Most of the 50 or so U.S. exchanges regulate themselves and design their own tools for slowing or halting trading.
During the recent plunge, the New York Stock Exchange slowed trading according to its rules but the orders that couldn't be executed migrated in a torrent to electronic exchanges, industry officials said.
The SEC and the Commodity Futures Trading Commission, in a report by their staffs, said the agencies' investigation of the epic dive — in which the Dow Jones industrials lost nearly 1,000 points in less than a half-hour — is still in a preliminary stage.
"The decline and rebound of prices in major market indexes and individual securities on May 6 was unprecedented in its speed and scope," said the joint report released Tuesday evening. "The whipsawing prices resulted in investors selling at losses during the decline and undermined confidence in the markets."
Only a preliminary picture has started to emerge, the report said. Investigators are focusing on, among other things, a possible link between the steep decline in prices of stock indexes, and "simultaneous and subsequent" waves of selling in individual stocks.
SEC Chairwoman Mary Schapiro told a gathering of financial analysts Tuesday there are issues "we think can be remediated quickly even before we understand necessarily what the exact cause of the crash was."
The SEC would vote on formally approving the rules sometime after a 10-day comment period, unusually short for the agency's rule-making and indicating the urgency of the issue.
