SEC looking at new rules on broken trades after May 6 plunge; CFTC mulling trader rules

Agencies consider new rules post-plunge

WASHINGTON — The Securities and Exchange Commission is looking to craft new rules covering cancellation of trades to make it fairer and more consistent in the wake of the May 6 market plunge, the agency’s chairman told a Senate panel Thursday.

Retail investors were affected by the nearly 21,000 trades that were canceled by exchanges because they were deemed erroneous following the chaos of the “flash crash,” and senators pressed at a hearing for remedies.

“The rules have got to have clarity,” SEC Chairman Mary Schapiro said. “You’ve got to provide certainty up front.”

The agency will put together new rules governing broken trades in the next few weeks, Schapiro told the Senate Banking subcommittee on securities.

“It’s hard for me to understand … how any trades can be broken arbitrarily by an exchange,” said Sen. Jim Bunning, R-Ky. “That is unfair; it undermines market discipline.”

Gary Gensler, chairman of the Commodity Futures Trading Commission, said his agency is considering new rules governing the high-frequency traders that position their powerful computers close to the big exchanges’ data centers. The practice, called co-location, can cut the speed traders’ times by milliseconds.

Gensler and Schapiro appeared at the Senate hearing two weeks after the Dow Jones industrials dropped nearly 1,000 points in less than 30 minutes.

High-frequency traders can make money by exploiting stock indexes that don’t immediately reflect falling or rising prices of their component stocks, experts say. Their critics say split-second trading without human supervision is a recipe for disaster.

Schapiro said the SEC has received numerous complaints from investors caught in the market plunge and is looking at actions involving all market players. Many of the investors used so-called “stop-loss” market orders to protect themselves in the market freefall. Stop-loss orders set the price at which a stock is automatically sold when it declines to a specified level.

“I am deeply concerned about the effects that this volatile market had on investors, especially retail investors whose trading orders may not have behaved as they were intended or who otherwise may have been unfairly harmed,” Schapiro said.

Two weeks after the historic market plunge, federal regulators and U.S. securities exchanges are looking to a new plan to require breaks in trading during periods of high volatility.

The question is whether that will work. The big exchanges say that new curbs on trading known as “circuit breakers” will help prevent runaway market drops. But not everyone is convinced. To some market watchers, the rules are too limited. To others, the rules go too far.

The SEC announced Tuesday the new circuit breaker plan, agreed upon with the exchanges. Trading of any Standard & Poor’s 500 stock that rises or falls 10 percent or more within a five-minute period would be halted for five minutes. The rules would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time — nearly the entire trading day.