US market watchdogs and six major exchanges have agreed that new safeguards were needed to curb trading when markets are plunging, including circuit breakers for individual stocks, a source familiar with regulators’ talks said on May 10.
Securities and Exchange Commission Chairman Mary Schapiro, the leaders of major stock and option exchanges, and broker-dealer watchdog, the Financial Industry Regulatory Authority, met in Washington to discuss the causes of the market free fall on May 6 and possible reforms.
“As a first step, the parties agreed on a structural framework, to be refined over the next day, for strengthening circuit breakers and handling erroneous trades,” Schapiro said in a statement.
The SEC did not provide details on what the fixes would look like.
A source familiar with regulators’ talks said they have still not pinpointed the exact cause of the 20-minute market roller coaster, when stocks usually regarded as safe dropped precipitously for several minutes before recovering most of their losses.
Despite not knowing the cause, regulators have reached a general agreement on a three-part revamp of market safety valves, including a circuit breaker that applies across markets if individual stocks fall precipitously.
The agreement also covers the need for clear rules on dealing with erroneous trades, and on the need to update existing market-wide circuit breakers for severe market declines, the source said. The source spoke on condition of anonymity because the talks are private.
Currently, if the market falls more than 10 percent in a day before 2pm local time, a circuit breaker is triggered and shuts the market down for one hour. If the market falls more than 20 percent after 2.30pm, a circuit breaker is triggered, shutting down the market for the rest of the day.
Both the Dow Jones Industrial Average and Standard & Poor’s 500 Index never reached the crucial trigger point on May 6. The Dow fell as much as 9.2 percent and the S&P was off as much as 8.6 percent during the latter half of the trading day.
Schapiro held a two-hour meeting with the leaders of the New York Stock Exchange, the Nasdaq Stock Market, BATS, Direct Edge, the International Securities Exchange and Chicago Board Options Exchange.
NYSE Euronext Chief Executive Duncan Niederauer, Finra CEO Richard Ketchum and others told reporters afterward that the discussions were constructive, without providing details.
The exchange heads also met at the Treasury Department with Treasury Secretary Timothy Geithner, along with Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler.
Continuing to gather data
Four days after the market plunge and quick rebound, regulators are still scrambling for answers. The Dow Jones Industrial Average briefly went into a 1,000-point tailspin on May 6, rattling investors worldwide.
But a massive $1trn rescue package to safeguard indebted European nations cheered investors on the day of the meeting, with US stocks racking up their best one-day gain in over a year.
The CBOE VIX volatility index, known as Wall Street’s fear gauge, fell 29.6 percent – the largest percentage drop in its history – to end at 28.84 after leaping to its highest level in more than a year on May 7.
One prevailing theory is that the sharp fragmentation of the US stock marketplace and the accompanying patchwork of circuit breakers and safeguards exacerbated the market swoon.
That fragmentation is also slowing down regulators’ ability to piece together what happened, two sources familiar with the matter said.
The SEC continues to aggregate data from the 50 electronic trading venues, one source said, suggesting the fragmentation is hampering the ongoing investigation.
Senator Charles Schumer, a Democrat from New York, called for new systemwide circuit breakers that would put the brakes on free-falling individual stocks when a circuit breaker on one of the major exchanges is triggered.
NYSE curbs as template?
The NYSE introduced a trading curb on its floor May 6 that forced most trading to all-electronic exchanges such as the Nasdaq Stock Market and NYSE Euronext’s electronic Arca venue, which did not have similar curbs – a lack of uniformity seen as having worsened the wider market’s drop.
Now, regulators and the industry appear to be eyeing something like NYSE’s system as a template for the whole marketplace.
Trading speeds and volumes have ramped up over the last decade as regulators encouraged the proliferation of new trading venues to challenge the NYSE’s and Nasdaq’s near monopoly.
About five years ago, the NYSE executed more than 80 percent of trading in its listed securities. Now, parent company NYSE Euronext executes about 34 percent.
The SEC recently raised some red flags about the fragmented marketplace, proposing rules late last year that would shine more light on so-called dark pools, which are alternative trading venues that keep investors’ intentions anonymous.