WASHINGTON The head of the U.S. Commodity Futures Trading Commission on Monday urged a regulatory panel to consider making recommendations on price and volume limits for brokered trades.
Gary Gensler, the chairman of the CFTC, said a commission of experts that will advise the Securities and Exchange Commission and the CFTC should consider new obligations for brokers to avoid trades from clients that could disrupt the market -- such as a large order on May 6 which helped spark the stock market flash crash.
"One key lesson is that, under stressed market conditions, the interaction between the automated execution of a large sell order and trading algorithms can quickly erode liquidity and result in disorderly markets, especially if algorithms use volume as a proxy for liquidity," Gensler said remarks prepared for a conference on swap execution facilities.
"The events of May 6 demonstrate that, in volatile markets, high trading volume is not necessarily a reliable indicator of market liquidity," Gensler said.
The CFTC and SEC on Friday said a computer-driven sale worth $4.1 billion by a single trader helped trigger the flash crash, sending the Dow Jones industrial average plunging some 700 points in minutes.
The report did not name the trader, identified in May by Reuters as the money manager Waddell & Reed Financial Inc.
In his speech, Gensler said the trade order that helped spark flash crash was "on auto-pilot."
Gensler said regulators' experience with the flash crash will help inform them as they write detailed regulations to implement the Wall Street reform law.
He told the conference the CFTC estimates about 30 to 40 companies will register to trade swaps either as swap exchange facilities (SEFs) or exchanges.
The CFTC and SEC plan to unveil proposed rules for SEFs by the end of the year. (Additional reporting by Jonathan Spicer; Editing by Alden Bentley)