Stock Market Plunge in May Eroded Investor Confidence, Regulators Are Told

The rapid plunge of stock prices on May 6 has diminished investor confidence in markets that increasingly rely on computers to trade thousands of shares in milliseconds, industry executives said.

“The biggest impact of the flash crash, from the standpoint of the individual investor, was not the effect it had on their brokerage account balances but rather the effect it had on their confidence,” Charles Rotblut, vice president of the American Association of Individual Investors, told regulators in Washington today. “They are concerned that the unusual volatility” might “happen again.”

A BlackRock Inc. survey found that a majority of financial advisers cite overreliance on computers and high-frequency trading as “primary drivers” of the crash, Noel Archard, a managing director at the New York-based investment firm, said at a meeting held by the Securities and Exchange Commission and the Commodity Futures Trading Commission. Shareholders fear that “complex software programs” have too much influence over stock prices, Rotblut said.

The erosion in confidence increases pressure on the SEC and CFTC to explain why markets fell and then almost instantly rebounded three months ago. The SEC is implementing new rules as it examines the crash, such as trading halts when stocks fall 10 percent in five minutes and guidelines for canceling trades.

Persistent Volatility

Financial advisers believe market volatility will persist or increase over the next six months, said Archard, who leads the product team for BlackRock’s U.S. exchange-traded fund business. BlackRock, the world’s biggest asset manager, conducted its survey of 380 industry participants in June.

“Those surveyed anticipate an event similar to May 6 will likely occur again, no matter what solutions are adapted,” Archard said.

The SEC and CFTC on May 18 released preliminary findings on the crash. The regulators will issue a “follow-up” report in September, CFTC Chairman Gary Gensler said today.

SEC Chairman Mary Schapiro said her agency is considering additional rules as it reviews the plunge.

She said the SEC may eliminate so-called stub quotes, which are prices far from current trading values. Stub quotes exist to fulfill an obligation some brokers have to buy and sell stock. When they were triggered on May 6, some stocks traded for pennies.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

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