SEC focuses on "crazy" algos after flash crash

By Rachelle Younglai and Jonathan Spicer

NEW YORK (BestGrowthStock) – The Securities and Exchange Commission will take further steps to make markets more stable and trustworthy following the May “flash crash,” and is zeroing in on lightning fast computer trading codes that “go crazy,” the agency’s head said on Monday.

The SEC, the top U.S. securities regulator, must address the use of algorithms, the computer codes that power high-frequency trading and disrupt the marketplace, SEC Chairman Mary Schapiro told the Securities Industry and Financial Markets Association annual conference on Monday.

“We hope this will lead to a more stable marketplace,” she said.

The SEC has been under pressure to bolster the integrity of the markets after the May 6 “flash crash” caused stocks to plunge wildly, wiping out $1 trillion in market capital, and then recovered in mere minutes. The SEC has already rolled out a program to protect companies’ stocks if they are dropping uncontrollably.

On Monday, the SEC adopted a plan to eliminate so-called stub quotes, quotes that are priced well off the public price of a stock.

Schapiro said more has to be done and that her agency would continue to work on improving the structure of the markets, now deeply fragmented and dominated by high-frequency trading.

“Some high-frequency traders are not registered or regulated at all,” Schapiro told reporters on the sidelines of the conference. “There’s an issue about the use of disruptive algorithms in the marketplace, that contribute dramatically to volatility and instability.”

The SEC is considering “certain throttles” that would govern the way algorithms impact the marketplace, possibly slowing them down, she said.

Under the new Dodd-Frank regulation law, the SEC must craft more than 100 rules for the financial industry, including new regulations for the $615 trillion over-the-counter derivatives market and hedge funds.

Although the SEC must adopt the bulk of the new rules by July 2011, Schapiro said that fine tuning the markets’ structure continued to be a top priority. “We will stay focused on this no matter what,” she said.

CONFIDENCE AT ISSUE

Any changes to the complex, fast-paced stock market could redirect the flow of tens of trillions of investment dollars annually and impact the businesses of banks, hedge funds, exchanges and the increasingly powerful proprietary trading firms that interact daily.

Some have grown frustrated with regulators’ response to the unprecedented flash crash, which shook investors’ confidence in the stability of markets.

“What’s come out of the SEC since the flash crash has been vague and lacking substance. Until there’s more substance on any commentary, it’s not going to have any impact on the market,” said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

“I think all traders are looking for greater rule clarifications regarding high-frequency traders and algorithms in general.”

Schapiro later told Reuters Insider that the stub quote rule is “not the biggest step in the world.”

Other SEC steps since the crash included adding circuit breakers that pause trading when stocks plunge or soar. Schapiro on Monday said one algorithm recently triggered a breaker when it “tried to sell 10 percent of the daily volume of a stock in two seconds.

“That’s a huge volume disruption,” she said.

She also said that, in general, the Dodd-Frank law was not punitive, and that some areas, such as the off-exchange derivatives market and hedge funds, were sorely in need of federal supervision.

(Reporting by Jonathan Spicer and Rachelle Younglai; Additional reporting by Caroline Valetkevitch; Editing by Jackie Frank, Tim Dobbyn and Leslie Adler)

SEC focuses on "crazy" algos after flash crash