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U.S. Regulators, Exchanges Pledge Changes After Market’s Plunge

May 11 (Bloomberg) -- Regulators and exchanges pledged to change rules and the structure of U.S. markets in response to last week’s stock plunge even though they haven’t determined what caused the share prices to tumble.

U.S. Securities and Exchange Commission Chairman Mary Schapiro and executives at NYSE Euronext and Nasdaq OMX Group Inc. agreed that all venues need uniform halts to shut down trading during investor panics. Though regulators and exchanges dispelled rumors about what caused the Dow Jones Industrial Average to fall as much as 9.2 percent on May 6, examinations of trading data haven’t yielded firm conclusions about what did, Schapiro said in testimony prepared for a congressional hearing.

“We are unable to point to a single event which could have been the sole cause,” Schapiro plans to tell members of the House Financial Services capital markets subcommittee at a hearing today. “The SEC is engaging in a comprehensive review and will take necessary steps to implement additional safeguards. The events of last week are unacceptable.”

The SEC and Commodity Futures Trading Commission face pressure to show they have a grip on increasingly fragmented markets dominated by computerized trading of stocks and futures. Representative Paul Kanjorski, who leads the House panel, called the hearing to scrutinize whether technology and competition for NYSE and Nasdaq contributed to last week’s free fall.

“As old trading methods have given way to modern techniques, the rules governing our market architecture have lagged behind,” said Kanjorski, a Pennsylvania Democrat. “The markets were hardly fair or orderly during last Thursday’s roller-coaster ride.”

Communication Problems

Heavy trading in Standard & Poor’s 500 Index futures and data communication problems between electronic exchanges helped trigger the plunge, according to Eric Noll, Nasdaq’s executive vice president for transaction services.

While the market-wide stock drop matched the decline in the S&P 500 E-mini, a Chicago Mercantile Exchange-traded future that tries to mirror what the price of the benchmark index will be a month from now, Schapiro said it can’t yet be determined whether trading in the contract helped caused the rout.

“The fact that stocks prices follow futures prices chronologically does not demonstrate what may have triggered the price movements,” she said.

Long Positions

CFTC Chairman Gary Gensler said his agency is examining the 10 traders holding the biggest long positions in the S&P 500 mini and the 10 traders with the biggest shorts on the contract. The CFTC sent letters to market participants seeking data on their positions and “all communications related to trading” on May 5 and May 6, Gensler said.

The Dow on May 6 suffered its biggest tumble since the crash of 1987, before paring losses and closing down 3.2 percent. About $700 billion was erased from American equity markets over an eight-minute span after the NYSE took actions to slow trading, data compiled by Bloomberg show.

Evidence reviewed by regulators indicates neither a so-called “fat finger” error, an offer to sell Procter & Gamble Co., or a terrorist cyber attack triggered the temporary slump in financial markets.

CNBC cited “multiple sources” in reporting May 6 that New York-based Citigroup Inc. may have made a mistake in entering a transaction. Citigroup spokeswoman Danielle Romero-Apsilos said “rumors about a trading error by Citi are unfounded.”

Cincinnati-based Procter & Gamble Co., the world’s biggest consumer products company, fell as much as 37 percent for the biggest intraday drop among Dow industrials.

Circuit Breakers

In a meeting yesterday, the SEC and exchanges discussed market-wide circuit breakers that would halt trading for 15 minutes whenever the S&P 500 fell 5 percent, Noll said. The proposal would shut trading for an hour when the index lost 10 percent and close markets for the rest of the day when it fell 20 percent.

The “spasm of selling” that spread across exchanges during the plunge underscores the need for uniform halts at all trading venues during periods of market stress, NYSE Euronext Chief Operating Officer Larry Leibowitz said in his prepared testimony.

Leibowitz defended the NYSE’s decision to slow trading in some stocks by saying the exchange never “stepped away from the marketplace during the crisis.”

To contact the reporter on this story: Jesse Westbrook in Washington at

To contact the editor responsible for this story: Alec McCabe at

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