WRAPUP 1-Stock shock roils US Congress amid Wall St debate
* Senators Kaufman, Warner seek amendment on sell-off
* House markets panel sets hearing on sell off for Tuesday
* Technology errors must not spook markets - Rep Kanjorski
* SEC, CFTC looking into 'flash crash' sell-off
(Recasts with Kaufman-Warner letter; adds Engelhard, Coffee, Miller comments)
By Kevin Drawbaugh and Margaret Chadbourne
WASHINGTON, May 7 (Reuters) - Shock waves from the stock market plunge rippled through Washington on Friday, prompting lawmakers to call for an amendment to a Wall Street reform bill that could lead to safeguards against technology glitches.
Senators Ted Kaufman and Mark Warner, both Democrats, want market regulators to report on Thursday's dizzying decline and say whether new circuit breakers are needed for computer-driven trading, according to a copy of a letter obtained by Reuters.
The two asked Senate Banking Committee Chairman Christopher Dodd, manager of the bill, to amend it with that request.
The stock slump occurred during rising market concern about the Greek debt crisis and is believed to have been exacerbated by at least one large erroneous trade, labeled by some as a "fat finger," or inaccurate key stroke.
Market participants have speculated high-frequency and algorithmic trading magnified the wild swing.
"A temporary $1 trillion drop in market value is an unacceptable consequence of a software glitch," Kaufman and Warner wrote.
(For a full story on the letter, double-click on [ID:nN07228592])
The baffling episode on Thursday, when the Dow Jones industrial average fell nearly 1,000 points in just minutes, was unlikely to change the course of the Senate bill, a top priority of President Barack Obama, analysts said.
The measure is widely expected to win Senate approval this month, then to be merged with a House bill approved in December. Final legislation could be on Obama's desk to be signed into law by mid-year, the analysts said.
Congress is essentially trying to put in place reforms that address the debt bubble-driven financial crisis of 2008-2009, aiming to prevent a repeat of the bailouts that followed. The bill does not focus closely on trading technology.
The seeds of a possible regulatory response have at least been planted by the U.S. Securities and Exchange Commission, which issued a white paper on "market structure" in January. It looks at "high frequency trading, order routing, market data linkages, and undisplayed, or 'dark,' liquidity."
Analysts were betting new attention would be paid to the paper at the SEC and the Commodity Futures Trading Commission.
"Both the SEC and the CFTC will now be reviewing very carefully new rules, particularly some mechanism to slow down algorithmic trading when you have market disruptions," said Joseph Engelhard, policy analyst at Capital Alpha Partners.
The SEC and CFTC have already said they are reviewing the unusual trading activity on Thursday.
GREECE, 'FAT FINGER' EYED
The sell-off -- marked by the largest intraday decline in the history of the benchmark Dow Jones average -- will be probed by a congressional subcommittee at a hearing on Tuesday, said Representative Paul Kanjorski, chairman of the panel.
"We cannot allow a technological error to spook the markets and cause panic. This is unacceptable," Kanjorski said in a statement.
A spokeswoman for the Senate Banking Committee said it intends to hold a hearing, as well, after the reform bill clears the Senate.
The breath-taking decline reminded veteran observers of Black Monday in 1987, with one exception. While that crash occurred over several hours, driven largely by computer program trading, the swoon on Thursday took place in minutes.
"This is 1987 all over gain, exacerbated by computer programming that works off a small drop in any stock or the market," said Columbia University Law Professor John Coffee, a noted expert in securities law and the markets.
"Thus, the party with a hair trigger response sends the market down in seconds so that it sets off traders with a more conservative pre-programmed response. One reform would be to have a very short (15 minutes) trading halt after, say, a 5 percent market drop," Coffee suggested.
Part of the response after Black Monday in 1987 at the New York Stock Exchange was to adopt "circuit breakers" that impose pauses in trading during large, sudden market swings.
(Additional reporting by Donna Smith, Rachelle Younglai, Karey Wutkowski and David Lawder; Editing by Andrew Hay)
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