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Circuit Breakers Could Allow Market Disruption, Chilton Says

Proposed regulations aimed at halting volatile trading in U.S. securities markets may still allow for market disruptions and expose regulators to a backlash, said Bart Chilton, a member of the Commodity Futures Trading Commission.

The Securities and Exchange Commission is seeking comments on proposals submitted by U.S. equities exchanges and the Financial Industry Regulatory Authority to change how circuit breakers are used to halt trading. The proposal would allow for a 20 percent move in the value of an index during the last 35 minutes of trading without a circuit breaker being triggered, Chilton, a Democrat on the five-member commission, said in a speech prepared today for the Golden Networking High-Frequency Trading Leaders Forum 2011 held in Chicago.

“Such a move, while unlikely, would be extraordinarily disruptive, would threaten the market’s infrastructure, and could lead to substantial criticism about what regulators thought was a-okay,” he said. “I understand that markets need the freedom to discover a closing price, but 20 percent in 35 minutes. Really? I don’t think that’s cool.”

Regulators have been seeking ways to prevent disruptions such as the May 6, 2010, plunge in which the Dow Jones Industrial Average briefly dropped 9.2 percent.

At the Chicago session, Chilton didn’t deliver the remarks about specific trading percentages. The percentages came from a prepared text that was changed before the speech, he said later today.

Chilton also said he is calling on the CFTC to propose that high-frequency traders register with regulators next year.

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