Exchanges agree to bolster breakers

Securities and Exchange
Commission Chairman Mary Schapiro, the leaders of major stock and
option exchanges, and broker-dealer watchdog, the Financial Industry
Regulatory Authority, met in Washington to discuss the causes of the
market free fall on May 6 and possible reforms.

“As a first
step, the parties agreed on a structural framework, to be refined over
the next day, for strengthening circuit breakers and handling erroneous
trades,” Schapiro said in a statement.

The SEC did not provide details on what the fixes would look like.

A
source familiar with regulators’ talks said they have still not
pinpointed the exact cause of the 20-minute market roller coaster, when
stocks usually regarded as safe dropped precipitously for several
minutes before recovering most of their losses.

Despite not
knowing the cause, regulators have reached a general agreement on a
three-part revamp of market safety valves, including a circuit breaker
that applies across markets if individual stocks fall precipitously.

The
agreement also covers the need for clear rules on dealing with
erroneous trades, and on the need to update existing market-wide
circuit breakers for severe market declines, the source said. The
source spoke on condition of anonymity because the talks are private.

Currently,
if the market falls more than 10 percent in a day before 2pm local
time, a circuit breaker is triggered and shuts the market down for one
hour. If the market falls more than 20 percent after 2.30pm, a circuit
breaker is triggered, shutting down the market for the rest of the day.

Both
the Dow Jones Industrial Average and Standard & Poor’s 500 Index
never reached the crucial trigger point on May 6. The Dow fell as much
as 9.2 percent and the S&P was off as much as 8.6 percent during
the latter half of the trading day.

Schapiro held a two-hour
meeting with the leaders of the New York Stock Exchange, the Nasdaq
Stock Market, BATS, Direct Edge, the International Securities Exchange
and Chicago Board Options Exchange.

NYSE Euronext Chief
Executive Duncan Niederauer, Finra CEO Richard Ketchum and others told
reporters afterward that the discussions were constructive, without
providing  details.

The exchange heads also met at the Treasury
Department with Treasury Secretary Timothy Geithner, along with
Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler.

Continuing to gather data
Four
days after the market plunge and quick rebound, regulators are still
scrambling for answers. The Dow Jones Industrial Average briefly went
into a 1,000-point tailspin on May 6, rattling investors worldwide.

But
a massive $1trn rescue package to safeguard indebted European nations
cheered investors on the day of the meeting, with US stocks racking up
their best one-day gain in over a year.

The CBOE VIX volatility
index, known as Wall Street’s fear gauge, fell 29.6 percent – the
largest percentage drop in its history – to end at 28.84 after leaping
to its highest level in more than a year on May 7.

One
prevailing theory is that the sharp fragmentation of the US stock
marketplace and the accompanying patchwork of circuit breakers and
safeguards exacerbated the market swoon.

That fragmentation is
also slowing down regulators’ ability to piece together what happened,
two sources familiar with the matter said.

The SEC continues to
aggregate data from the 50 electronic trading venues, one source said,
suggesting the fragmentation is hampering the ongoing investigation.

Senator
Charles Schumer, a Democrat from New York, called for new systemwide
circuit breakers that would put the brakes on free-falling individual
stocks when a circuit breaker on one of the major exchanges is
triggered.

NYSE curbs as template?
The
NYSE introduced a trading curb on its floor May 6 that forced most
trading to all-electronic exchanges such as the Nasdaq Stock Market and
NYSE Euronext’s electronic Arca venue, which did not have similar curbs
– a lack of uniformity seen as having worsened the wider market’s drop.

Now, regulators and the industry appear to be eyeing something like NYSE’s system as a template for the whole marketplace.

Trading
speeds and volumes have ramped up over the last decade as regulators
encouraged the proliferation of new trading venues to challenge the
NYSE’s and Nasdaq’s near monopoly.

About five years ago, the
NYSE executed more than 80 percent of trading in its listed securities.
Now, parent company NYSE Euronext executes about 34 percent.

The
SEC recently raised some red flags about the fragmented marketplace,
proposing rules late last year that would shine more light on so-called
dark pools, which are alternative trading venues that keep investors’
intentions anonymous.