Flash Crash Panel to Discuss Market Fixes with Regulators The May 6 "flash crash" is still somewhat of an enigma, but an advisory panel meeting on Friday to review a report into it could at least help regulators establish some new market rules to prevent similar crashes from occurring in the future, Reuters reports.

Over a period of 20 minutes on May 6, the Dow Jones Industrial Average plummeted roughly 700 points, then rebounded sharply. The report into the wild oscillation, issued jointly by the Commodity Futures Trading Commission and Securities and Exchange Commission, partially blames the dramatic market fall on a single computer-initiated trade by a mutual fund -- a $4.1 billion sale of e-mini futures contracts by Kansas-based Waddell & Reed Financial.

But critics say that one trade alone couldn't have caused the plunge. The CEO of Chicago Board Options Exchange parent CBOE, the largest U.S. options exchange, William Brodsky, said the report falls short of explaining the flash crash. "We went on for months and months and still didn't know what happened," he told a Futures Industry Association conference, Reuters reports. The explanation "just doesn't add up in my view," he said.

The panel is expected to discuss potential recommendations Friday and give the SEC and CFTC justifications to modify market rules, Reuters reported.

One target of those changes is likely to be high-frequency traders, who use computer-driven algorithms to quickly create and execute trades -- fractions of a second before ordinary investors can. Lawmakers have focused on high-frequency traders in pressuring the SEC to act.

Meanwhile, with the temporary "circuit breaker" program implemented following the crash set to expire on Dec. 10, the SEC is pressuring exchanges to come up with a "limit up/limit down" rules, Reuters reports sources have said. Those rules would set temporary price ceilings and floors for single stocks and could cushion big price changes without stopping trading.

The SEC is also considering a new market-wide "circuit breaker" to replace the current one, which was not triggered on May 6. Also, as a lack of liquidity further exacerbated the flash crash, regulators are mulling tightening the rules for market makers to ensure they will be able to provide liquidity to markets should the need arise.

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November 05 2010 at 11:17 PM Report abuse rate up rate down Reply

Golden Networking (http://goldennetworking.net) is organizing the High-Frequency Trading Experts Workshop 2010 (http://www.HFTExpertsWorkshop.com), “Practical Implementation of High-Frequency Trading Strategies," on December 9th and 10th in New York City. It has been recommended for executives in finance and investments who work at Investment Banks, Hedge Funds, Pension Funds, Broker Dealers, Consultancy Groups, Prime Brokers, Solution Providers and Exchanges and wish to gain a thorough understanding and practical knowledge of high-frequency trading.

November 05 2010 at 11:54 AM Report abuse rate up rate down Reply