* SEC probes market professionals in market crash
* Exchanges defend high-frequency trading
* CFTC again mentions large trader; reported as Waddell
* SEC wants proposals on clear rules to cancel trades
(Updates to Thursday's market close in third paragraph)
By Rachelle Younglai and Jonathan Spicer
WASHINGTON/NEW YORK, May 20 Frustrated
lawmakers pressed regulators to move faster to pinpoint the
cause of the mysterious May 6 market crash, with two weeks
of investigation producing few answers.
"If they don't know the exact cause, how in the heck do the
investors expect to have confidence in the market," said
Republican Senator Jim Bunning.
Thursday's Senate Banking subcommittee hearing took place
on a day when major U.S. stock indexes closed down nearly 4
percent on fears a European sovereign debt crisis could
jeopardize the global economic recovery. [ID:nN20166368]
The latest decline was fairly orderly compared to the May 6
swoon than saw the Dow Jones Industrial Average .DJI briefly
down nearly 10 percent.
Regulators and exchange executives had little new to offer
lawmakers. They continue to pursue multiple theories on the
cause and look to implement trading pauses for individual
stocks during sharp declines, beginning possibly in June.
"They don't have a solution yet. It could happen again,"
Bunning, from Kentucky, told reporters after the subcommittee
Securities and Exchange Commission Chairman Mary Schapiro
defended her agency and said more than 100 SEC staffers were
working around the clock, analyzing millions of trades, and
probing any wrongdoing.
The SEC is investigating whether market professionals met
their obligations, including a requirement to provide clients
the best possible trade executions, Schapiro testified.
Fellow market regulator, the Commodity Futures Trading
Commission, is examining the activities of large traders and
reviewing the role of electronic trading platforms.
CFTC Chairman Gary Gensler told the hearing that the
unexplained plunge and the rise of algorithmic trading
necessitate a review to determine if further protections are
needed in fast-paced, computer-driven markets. [ID:nWALKGE65P]
Major U.S. exchanges defended high-frequency trading
activities, saying it keeps markets liquid, even though
lawmakers' charged rapid traders have an unfair advantage over
the average investor. [ID:nN20137069]
Regulators have been analyzing more than 19 billion shares
traded May 6 and are examining a multitude of factors,
including the links between declines in prices of stock index
products such as E-mini S&P futures contracts and the use of
stop-loss market orders.
Schapiro finds no evidence so far of a big "fat finger"
trade made in error, computer hackers or terrorist activity.
But lawmakers were unhappy with the pace of the probe.
"It's a couple of weeks after the fact and we still don't
know how this even started in the first place," complained
Democratic Senator Mark Warner.
Lawmakers also were upset about how trades were canceled
after markets closed May 6, including more than 10,000 on the
Nasdaq alone. "I am very concerned that it undermines market
discipline," said Bunning.
The SEC has given major exchanges two weeks to propose
clear rules to cancel trades.
Graphics on May 6 plunge:
Factbox on canceled trades: [ID:nN12184775]
WADDELL & REED
The CFTC, as it did last week before a House committee,
singled out an unnamed trader, saying the firm "sought to hedge
its stock portfolio in the futures markets by selling a
predetermined amount of futures through an executing broker's
automated execution system."
Reuters reported last week that the firm is money manager
Waddell & Reed Financial Inc (WDR.N), according to an internal
CME Group Inc (CME.O) document that said Waddell sold a large
order of E-minis during the May 6 roller-coaster trading.
Gensler said the firm entered its sell orders in a way
meant to limit the impact on markets, but because of the
extreme volume jump, the firm's trading "may have had an
unintended market impact."
It took about 21 minutes for the firm to execute its sell
order, Gensler said. "In markets with average volume, it would
have taken significantly longer -- perhaps hours."
LIQUIDITY UNDER STRESS
U.S. exchanges told the panel that the high-speed trading
firms keep markets liquid and functioning, with one suggesting
incentives to encourage their participation at stressful times
such as the mysterious plunge.
Regulators should consider "creating better incentives to
provide liquidity during periods of market stress," Nasdaq OMX
Group Inc (NDAQ.O) Executive Vice President Eric Noll said in
High-frequency traders use lightening-fast computer
algorithms to make markets and take advantage of tiny
imbalances, and are involved in an estimated 60 percent of U.S.
stock trading volume. Some big firms stopped trading during the
The SEC and major U.S. exchanges have proposed new rules to
pause stock trading when markets are in crisis.
The restrictions known as circuit breakers would apply to
all stocks in the Standard & Poor's 500 index .SPX, and
initially would exclude exchange-traded funds (ETFs).
The proposal needs approval from the SEC before the rules
go into effect. The SEC plans to roll out the rule in a
six-month trial period starting around June. [ID:nN19262236]
NYSE Euronext NYX.N expects all U.S. stocks will be
subjected to circuit breakers by the end of the year.
(Reporting by Christopher Doering, Kim Dixon, Rachelle
Younglai in Washington and Jonathan Spicer in New York, editing
by Dave Zimmerman and Tim Dobbyn)