NEW YORK The top U.S. securities regulator is set to drill down into the minutiae of market structure on Wednesday, when a who's who in the trading world gathers in Washington nearly a month after the mysterious "flash crash" revealed deep flaws in the system.
The Securities and Exchange Commission hosts the roundtable as hopes wane that anyone will pinpoint a single cause of the May 6 crash, in which the Dow Jones industrial average plunged some 700 points in minutes before sharply rebounding.
A person familiar with the ongoing investigation said it is focused on connections between the futures and cash equities markets, and whether futures trading precipitated the plunge.
Still lacking clear answers, regulators and exchanges have pitched a handful of rule changes meant to avoid a repeat of the crash. Those include new circuit breakers to pause trading; clear rules for breaking trades after problems occur; and a consolidated audit trail of all trading, which likely would have made the search for answers easier.
Even more changes could come, as the plunge gave credence to some long-shot ideas mulled by regulators over the last year, such as saddling high-frequency traders with commitments to trade.
The crash "happened in a very extreme way at a velocity that we had yet to see, and it ... really exposed some of the microstructure issues that we have," John Netto, founder and CEO of brokerage M3 Capital, said at the High-Frequency Trading Leaders Forum here last week.
The SEC roundtable, conceived earlier this year, also comes as the regulator digests more than 200 letters in response to its wide-ranging paper on trading and market structure.
The co-called concept release was published in January in response to concerns building through 2009 over the fairness and stability of the high-tech U.S. marketplace, where some 50 electronic trading venues compete for ever faster and heavier order flow.
A series of regulatory changes since 1998 effectively encouraged the proliferation of alternative, non-exchange trading venues in the United States, as well as the reliance on computerized high-frequency trading to ensure there is enough liquidity to keep markets flowing.
The roundtable includes Vanguard Group Chief Investment Officer Gus Sauter, Credit Suisse Group AG Managing Director Dan Mathisson, experts from universities, exchanges, and big market makers and high-frequency traders like RGM Advisors and Getco LLC, whose CEO, Stephen Schuler, will attend.
High-frequency traders use lightning-quick algorithms to capitalize on tiny market imbalances, and have kept a low profile in recent years even as they grew to be involved in an estimated 60 percent of all U.S. stock trading volume.
This trading -- a key topic in the concept release -- has mostly replaced brokers who in the past handled far fewer but larger orders at much wider spreads, often on exchange floors.
"What folks are realizing is that it wasn't just one event or trade or group that lead to May 6, but that it's really a combination of rules and the industry's response," said Adam Sussman, director of research at consultancy TABB Group.
"There's an Achilles heel in all of this, and it's not so easy to identify and resolve," he added. Regulators "have been looking at this for a while, and May 6 was really a catalyst to dig deeper into these questions."
In testimony to lawmakers last month, regulators and exchange executives tried to temper expectations that a single cause of the so-called flash crash would emerge. They instead highlighted new proposals, some hastily crafted and others in the works prior to the crash:
* New circuit breakers that halt trading in a stock for 5 minutes if it moves more than 10 percent in a 5-minute period. The SEC also plans to adjust its long-standing market-wide breakers, which did not trip on May 6.
* Clear rules for "busting" trades, which would eliminate confusion when things go awry. After markets closed May 6, the exchanges decided to cancel trades executed in a 20-minute time frame that were greater than or less than 60 percent away from the stock's last print.
* An audit trail of trading in every stock and listed option that would improve market-wide surveillance and reveal suspicious trading and unusual market events.
* A crackdown on so-called stub quotes, which are standing orders well off the reasonable price of a stock. Many were executed May 6, for as little as a penny. Market orders and stop-loss selling could also see curbs.
The SEC's 74-page concept release raised several other possible new rules that could now gain traction:
* "Obligations" for market makers and proprietary trading firms meant to ensure a reliable supply of liquidity during "times of stress." Some big proprietary firms said they stopped trading as markets swooned May 6.
* A "trade at rule" that would bar venues from executing trades at the best available U.S. bid or offer unless the venue previously had that price displayed. This could curb so-called dark pools where trading is done anonymously, and rein in the fragmented marketplace seen to have exacerbated the crash.
"I think that we would all agree that it was probably a cascade of disparate events that happened across the landscape" on May 6, Erik Lehtis, president of DynamicFX Consulting and a former foreign exchange head at proprietary trading firms, said at the Leaders Forum.
"You had systematic failures."
(Reporting by Jonathan Spicer, editing by Matthew Lewis)