In response to the wild ride U.S. stocks endured Thursday, executives from six U.S. stock exchanges yesterday (Monday) agreed on a framework for "strengthening circuit breakers and handling erroneous trades," the U.S. Securities and Exchange Commission announced.
NYSE Euronext (NYSE: NYX), Nasdaq OMX Group Inc. (Nasdaq: NDAQ), Bats Global Markets, Direct Edge Holdings, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. (Nasdaq: CME) met with SEC Chairwoman Mary L. Schapiro on Monday morning.
The SEC's Schapiro, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and officials from the various exchanges were also to meet later yesterday with U.S. Treasury Secretary Timothy Geithner. Officials from the CME Group Inc. (Nasdaq: CME), the largest U.S. futures exchange, also were to attend that meeting – after having met earlier in the day with CFTC leaders, The Wall Street Journal reported.
Breaking in New Circuit Breakers
According to a Bloomberg News report, so-called "circuit-breaker" rules that can be deployed to slow down the pace of trading – or even to shut down markets outright – during periods with pre-defined levels of volatility may have prevented the worst of the losses incurred on Thursday, when the Dow Jones Industrial Average plunged as much as 998.5 points in a move that started late in the trading session, executives from Bats, Direct Edge and White Cap Trading said prior to Monday's announcement. At that low point, the Dow was down 9.2%, its biggest intraday loss since the crash of 1987. Losses were later pared and the gauge closed down 3.2%.
The Dow soared nearly 405 points, or 3.9%, yesterday, to close at 10,785.14. The Standard & Poor's 500 Index gained 4.4%, while the tech-laden Nasdaq Composite Index zoomed 4.8%, all part of a global relief that coincided with the announcement of a European bailout package. For the Nasdaq, yesterday's 109-point gain was its first triple-digit surge since October 2008.
Congressional hearings on what caused the plunge will be held today (Tuesday), U.S. Representative Paul E. Kanjorski, D-PA, and the chairman of the panel that will be holding the sessions, announced Friday. Kanjorski, head of the capital markets subcommittee of the U.S. House of Representatives, said the SEC must look into the matter, and noted that "additionally, my subcommittee will hold a hearing to examine this issue."
"The financial market's dramatic swing was incredibly startling," Kanjorski said in a statement. "Reports have surfaced that much of this movement was potentially as a result of a computer glitch. We cannot allow a technological error to spook the markets and cause panic. This is unacceptable."
The SEC's Schapiro, CFTC Chairman Gensler and officials from the NYSE, Nasdaq and CME also are expected to testify at the hearings this afternoon.
Anatomy of a Market Rout
Officials say that they still don't know for certain what caused the near-vertical sell-off on Thursday. But regulators are expected to focus especially closely on the second half of the Dow's nosedive, when losses may have been magnified because rapid-fire changes in prices triggered halts in some of the securities that trade in electronic fashion on the New York Stock Exchange. In cases were electronic buying or selling exceeds limits known as "liquidity replenishment points" – a stock-by-stock circuit breaker that the Big Board put in place in 2006 – the mechanism allows specialists in each stock to take over and slow trading down to "human speed."
However, some experts say that this "go-slow" approach causes trade executions at Big Board posts to slow exponentially, with some trades taking 30 seconds to 60 seconds to clear. At the same time, however, so-called "high-frequency traders" may have continued to "trade around" this intended safety mechanism.
And because these computer-based traders were selling into excruciatingly thin markets, bids collapsed.
In its statement yesterday, the SEC said that the major trading exchanges agreed that a marketwide circuit-breaker system should be established – eliminating the differences between how different exchanges handle unique market events. The SEC said the group – as a first step – agreed on a structural framework for unifying and strengthening circuit-breakers. Each agreed to get back to regulators within 24 hours with plans for how to alter their own rules to coincide with this standardized strategy, published reports state.
In contrast with the late 1980s, when most of the current circuit-breaker rules were devised, securities trading is now both computerized and decimalized. The new system would account for those changes, and would also embrace guidelines that are based on the time of the trading day and the particular stock in question.
News and Related Story Links:
- Bloomberg News:
Exchanges seek faster circuit breakers after market plunge.
- Money Morning News Analysis:
Thursday's Wild Stock Market Ride Spotlights 'High-Frequency Trading' as the Latest Worry For Investors.
- BATS Global Markets:
- Direct Edge Holdings:
Official Web Site.
- Money Morning News Analysis:
Career Regulator Mary Schapiro – a "Strong Investor Advocate" – is Reportedly Obama's Choice for SEC Chief.
- SEC Press Release:
SEC Statement on Meeting With Exchanges.
- The Wall Street Journal:
SEC, US Exchanges Agree To Create Market-Wide Circuit Breakers.
- The Free Dictionary:
Obama: Feds Looking Into Stock-Market Plunge.
- U.S. Rep. Paul E. Kanjorksi: