The Securities and Exchange Commission (SEC) is working with exchange groups on a new structural framework for the US equities market to prevent a repeat of the slump in stock prices on 6 May.
The US regulator issued a statement yesterday following a meeting with senior managers at six of the largest US securities exchange operators, confirming agreement on “a structural framework, to be refined over the next day, for strengthening circuit breakers and handling erroneous trades”.
On 6 May, the Dow Jones Industrial Average index temporarily fell almost 1,000 points to a low of 9,869.62. It recovered to close the day at 10,520.32, 3.2% lower than the previous close. Proctor & Gamble, which opened the day at $61.91, fell to a low of $39.37, before rebounding to close at $60.95, while consulting firm Accenture slid to sub-penny levels before closing at $41.09. The four main stock exchanges – NYSE, Nasdaq, BATS and Direct Edge – cancelled trades executed at the height of the turmoil, between 2.40pm and 3.00pm, New York time.
Despite yesterday’s meetings, neither exchanges nor regulators have yet provided an explanation for the sudden drop in prices on 6 May.
Circuit breakers are typically used by exchanges to call a temporary halt to trading in the event of extreme market conditions to prevent panic selling by market participants and to return the market to orderly trading. Some market observers have claimed that last Thursday’s collapse in US stock prices was exacerbated by the decision of the New York Stock Exchange (NYSE), which operates a hybrid trading model, to slow down trading by reverting to floor trading without acting in concert with its purely electronic competitors. At present, no industry-wide circuit breakers are in operation in the US securities or derivatives markets and the steady increase in liquidity fragmentation over the past decade is likely to make it difficult to implement common systems to halt activity across all trading venues. NYSE’s market share of US equity trading reached a new low of 25.6% in March.
The SEC statement was issued after SEC chairman Mary Schapiro met with NYSE, Nasdaq, BATS Exchange, Direct Edge, the International Securities Exchange, the Chicago Board Options Exchange and the Financial Industry Regulatory Authority to discuss the causes of the slump “and possible market reforms”.
The Commodity Futures Trading Commission (CFTC), which regulates derivatives activity in the US, met with Chicago Mercantile Exchange and the IntercontinentalExchange.
CFTC chairman Gary Gensler said the exchanges had provided detailed information about the market events of 6 May and confirmed that he had also met with US Treasury Secretary Timothy Geithner and the SEC “to discuss contributing factors of the unusual trading and the exchanges’ preliminary thoughts on how to best protect investors”.
Today, a hearing by the US Congress’s House Financial Services Subcommittee on Capital Markets into last week’s market events will be attended by representatives of the SEC, CFTC, NYSE, Nasdaq and CME.