Saturday, February 19, 2011

"Flash crash" panel calls for market overhaul

"Flash crash" panel calls for market overhaul

(Reuters) - Regulators should stem the growing tide of anonymous stock-trading and consider imposing fees on high-frequency traders, said a panel of experts advising how to avoid another "flash crash."

The panel's 14 recommendations for U.S. securities and futures regulators contained far-reaching ideas to overhaul the high-speed electronic market.

Yet many of the ideas issued on Friday called only for "consideration" or "further study" -- potentially raising more questions as the first anniversary of the May 6 flash crash nears.

"I don't think it's possible to prevent another one from happening," said Adam Sarhan, chief executive of Sarhan Capital in New York.

U.S. regulators were cautious about some of the boldest recommendations, including new fee structures to encourage liquidity and discourage high numbers of order cancellations.

"I do not know where we as a commission would come down on fees," Securities and Exchange Commission Chairman Mary Schapiro told reporters after meeting with the panel.

The unprecedented May 6, 2010, market crash sent the Dow Jones industrial average down some 700 points before rebounding, all in a matter of minutes. It rattled investors, exposed flaws in the structure of markets, and set regulators on a mission to fix the system and restore confidence.

Since then, individual stocks have experienced what some refer to as "mini" crashes, where shares unexpectedly move on a sudden burst of volume, absent of any news.

Prominent technology shares including Apple Inc and Cisco Systems Inc. have been halted after breaking through thresholds that automatically halt trading.

On September 27, shares of Progress Energy Inc were halted after plunging suddenly to $4.57 a share from $44.57 a share in a fraction of a second.

The eight-member panel suggested the SEC consider forcing the banks, hedge funds and others that facilitate stock-trading away from the public exchanges to give investors a better price by a minimum amount.

It also said stock pauses and limit-up/limit-down price bands would help reduce investor fears about how markets react in times of uncertainty.

"What market regulation now has to do is limit uncertainty," said Maureen O'Hara, professor of finance at Cornell University and member of the flash crash panel. "You limit uncertainty by limiting the amount of movement a price can have before it falls off the map."

The changes would require the SEC and fellow regulator, the Commodity Futures Trading Commission, to take on a massive amount of work at a time when the agencies are straining to carry out the Dodd-Frank financial reform law.

"Many market participants spent north of $1 billion a year on technology, and we as an agency only spent $31 million last year, and this year ... are actually cutting that back," CFTC Chairman Gary Gensler told reporters.