World Business

SEC mulls regulation after last week's shock declines

By Jesse Westbrook (China Daily)
Updated: 2010-05-10 10:41

SEC mulls regulation after last week's shock declines

For individual investors, experts say, now is not a good time to invest in property-related stocks since they may continue to fall in the short term because risks in the upstream and downstream companies in the industry have not been fully overcome. [Kevin Lee / Bloomberg]

NEW YORK - The US Securities and Exchange Commission (SEC) is considering regulatory changes aimed at slowing stock trading during periods of cascading prices, even though the agency hasn't yet concluded what caused last week's market plunge, two people familiar with the matter said.

SEC officials are weighing whether uniform trading curbs should be imposed across markets for companies that have fallen a certain percentage, said the people, who declined to be identified because the discussions are preliminary. The agency is examining whether any rules should include a time element because a steep decline that occurs in minutes may be more detrimental to markets than a decline over several hours, one of the people said.

US regulators and exchanges are trying to determine what happened after stocks fell on May 6, temporarily erasing more than $1 trillion in market value, in a rout fueled by waves of computerized trading. The SEC and Commodity Futures Trading Commission said in a joint statement last Friday that declines for individual stocks were "inconsistent" with well-functioning markets and pledged to make "structural" changes if necessary.

SEC spokesman John Nester declined to comment on internal agency discussions. Lawmakers are pressing the SEC for answers.

"Friday's flash crash was incredibly startling," Representative Paul Kanjorski said in a statement on Saturday, announcing a May 11 hearing to examine the incident. "We cannot allow technological problems, regulatory loopholes, or human blunders to spook the markets and cause panic."

Kanjorski, a Pennsylvania Democrat, also sent a letter to SEC Chairman Mary Schapiro seeking the agency's views on the incident and asking what power it has to prevent future crashes.

While the SEC is in the early stages of reviewing market data, the agency hasn't found evidence indicating that an erroneous trade or a computer glitch triggered the market rout, one of the people said.

CNBC citied "multiple sources" in reporting on May 6 that New York-based Citigroup Inc may have made a mistake in entering a transaction that contributed to the plunge. Citigroup said it found no evidence it was involved in an erroneous trade, a finding supported by futures market CME Group Inc.

"Based on our review, rumors about a trading error by Citi are unfounded," said Citigroup spokeswoman Danielle Romero-Apsilos.

SEC officials have internally circulated at least two memos outlining market mechanisms suspected of triggering or fueling the market decline, a person familiar with the discussions said.

One memo, circulated two days ago, outlines a scenario described publicly by stock-exchange officials, people who saw the document said. The theory advanced by the other memo couldn't be determined.

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