SEC, CFTC consider more rules to defuse 'flash crash'

The Securities and Exchange Commission and the Commodity Futures Trading Commission are considering additional rules to address the problems that bedeviled exchange-traded-fund providers during the May 6 “flash crash.” On that day, the Dow Jones Industrial Average dropped 1,000 points — with hundreds of stocks briefly trading at close to zero — before quickly rebounding. More than two-thirds of the trades canceled that day involved ETFs, causing regulators to investigate their role in the event. In the wake of the crash, the SEC and the CFTC set up a joint task force to investigate the causes. In June, the SEC approved rules that require the exchanges and the Financial Industry Regulatory Authority Inc. to halt trading in S&P 500 index stocks when they experience a 10% change in price during a five-minute period. The SEC is seeking comment about whether that program should be expanded to include all stocks listed in the Russell 1000 Index, as well as 344 specified ETFs. The task force held a panel discussion today with ETF providers and industry experts on whether it needs to issue additional rules to address trading mechanisms that may have contributed to the May 6 crash. “We are considering, as well, whether other steps are appropriate to reduce the risk of sudden disruptions and clearly erroneous trades, including deterring or prohibiting the use of ‘stub' quotes by market makers,” Mary Schapiro, chairman of the SEC, said in opening commentary at the meeting this morning. “And we are studying the impact of trading protocols at individual exchanges, including the use of trading pauses, price collars and self-help rules. Finally, we are looking closely at other mechanisms that may contribute to a more stable market, such as instituting limit up/limit down mechanisms,” Ms. Schapiro said. The SEC also is reviewing comments on another proposed rule it issued in the wake of the flash crash that is designed to set clear standards on when clearly erroneous trades can be broken, she said. The task force expects to publish a report on its recommendations and findings next month, Gary Gensler, chairman of the CFTC, said in opening comments at the meeting.