U.S. eyes new rules for market after "flash crash"

The final numbers of the day's trading following the 20-minute ''flash crash'' at the NYSE on May 6, 2010.

WASHINGTON (Reuters) - U.S. securities regulators are close to approving a plan to ensure markets remain liquid even in times of crisis, the chairman of the Securities and Exchange Commission said on Friday.

At a meeting to discuss the May "flash crash" that sent the Dow Jones industrial average into a brief 700-point freefall, SEC chief Mary Schapiro and other regulators were zeroing in on new rules to prevent another uncontrollable market plunge.

The brief market crash rattled investors already unhinged by the financial crisis.

The SEC acted with uncharacteristic speed and in June rolled out a temporary "circuit breaker" program to give a company's stock a reprieve from trading if it was plunging uncontrollably.

The SEC's lead flash crash investigator, Gregg Berman, said the circuit breaker has been triggered about a dozen times, and regulators are gleaning information to develop the next generation of circuit breakers. The current program ends December 10.

The SEC is focusing on "limit up/limit down" levels, which would set temporary price ceilings and floors for single stocks and could slow big price changes without stopping trading.

But ultimately regulators want to get to the heart of erroneous trades.

"Part of what our approach has been ... is to narrow or eliminate the circumstances in which you'd have erroneous trades because that seems to be the real policy objective in the first place," said Robert Cook, director of the SEC's trading and markets division.

REGULATORS UNDER PRESSURE

A report by the SEC and the U.S. Commodity Futures Trading Commission said a $4.1 billion sale of e-mini futures contracts by Waddell & Reed Financial contributed to the flash crash.

Although the government review does not blame high-frequency traders, the SEC and CFTC are under pressure to rein in the rapid traders, who use computer-driven algorithms to quickly create and execute trades.

"I think investor confidence is affected by the perception that high-frequency traders have unfair access to markets and market information," said Brooksley Born, a former CFTC chairman and a member of the flash crash advisory panel.

Born said regulators should look at this carefully. If rapid traders have advantages "they should also have some responsibilities," he said.

At the meeting between regulators and flash crash advisers, CFTC Chairman Gary Gensler said he wanted to know if additional risk protections should be considered for algorithmic and high-frequency trading.

Bart Chilton, a CFTC commissioner, told Reuters, "We need a team of experts at regulatory agencies that give, at the least, a quick look-see at robotic algorithmic programs to determine if there is the capacity to roil markets."

The flash crash advisory committee is composed of former and current regulators, financial players and a top economist. The panel was expected to discuss potential recommendations and give the regulators justification to tinker further with market rules. But Gensler said the panel was still formulating recommendations.

"They've obviously been under pressure to put recommendations out," said a Washington-based industry source. "Do they put something generic out because they need to put something out, or have they actually come to some conclusion as to what they think the right changes are going forward?"

The SEC is still considering a new marketwide circuit breaker to temporarily pause trading if a market is in crisis.

Chilton said "ratcheting down circuit breaker trigger levels" would improve the harmonization between the securities and futures markets and reduce the opportunities for the kind of arbitrage that "fuel-injected the flash crash price cascade."

(Reporting by Christopher Doering and Rachelle Younglai; Editing by Tim Dobbyn and John Wallace)