WRAPUP 7-New regulations likely as US probes big stock dive

* Investigators seek trades that triggered meltdown

* Nasdaq widens list of canceled trades

* Geithner held conference call with Bernanke – source

* Exchange CEOs in sniping match

* Wall Street lower in choppy trade
(Updates with details about ongoing investigation in
paragraphs 5-6)

By Jonathan Spicer and Rachelle Younglai

NEW YORK/WASHINGTON, May 7 (BestGrowthStock) – President Barack
Obama said on Friday that regulators would look for ways to
prevent a repeat of Thursday’s mysterious stock market
meltdown, adding to expectations the U.S. government will make
new regulations to curb runaway computer trading.

More than a day after a nearly 1,000-point drop in the Dow,
the government had not publicly pinpointed the reasons.

Growing concern about the Greek debt crisis, exacerbated by
a spike in the Japanese yen, may have caused computerized
trading programs to dump U.S. stocks (Read more about the stock market today. ). Initial theories had
focused on an individual trader erroneously entering an order,
known as “fat finger” on Wall Street.

“The regulatory authorities are evaluating this closely
with a concern for protecting investors and preventing this
from happening again,” said Obama, who called the selloff
“unusual market activity” when he spoke to reporters.

More than 50 people were working on the investigation into
the night on Friday — some who have slept for only two hours
since Thursday’s plunge — but regulators still do not know
whether it started outside or within equity markets, a
government source close to the probe told Reuters.

Politico, a news organization that covers U.S. politics and
government, said regulators were eyeing a series of high-volume
trades in S&P futures in Chicago as the trigger.

Whatever the cause, the biggest-ever intraday point drop in
the Dow stoked outrage among investors and politicians already
up in arms over Wall Street’s role in the global recession.

“We should expect the regulators to use every tool
available to them to lower the speed limit on financial
markets, and especially on banks,” Mohamed El-Erian, chief
executive of Pacific Investment Management Co, told Reuters
Insider. “You will see regulation, taxation and enforcement all
being used.”

Two Democratic senators called for an amendment to the
financial reform bill, asking U.S. regulators to report on the
causes of Thursday’s market plunge and whether circuit breakers
are needed for computer-driven trading.

The selloff came as the U.S. Senate debated Obama’s
proposed crackdown which, like recent civil fraud allegations
against Goldman Sachs Group Inc (GS.N: ), could fuel enthusiasm
for the legislation.

Indeed, Senators Ted Kaufman and Mark Warner asked
Christopher Dodd, chairman of the Senate Banking Committee, to
add their amendment to the bill, according to a copy of a
letter obtained by Reuters.

“A temporary $1 trillion drop in market value is an
unacceptable consequence of a software glitch,” Kaufman and
Warner said in the letter.

European Union market supervisors agreed on Friday to
intensify monitoring due to wild stock and derivative swings.

The Dow industrials finished down 3.2 percent on Thursday.
The index lost 1.3 percent on Friday but there was no sign of
the kind of selling that wracked the market on Thursday.


Take a Look-Panic on Wall Street [ID:nN06270185]

BreakingViews column [ID:nN06121498]

Graphic http://link.reuters.com/cej92k


“It’s a day that no one in the markets should be proud of,”
said William O’Brien, chief executive of Direct Edge, a trading
venue operator that handles more than 10 percent of all U.S.
stock trading. “While a lot of regulation worked to mitigate
the risks that became really evident yesterday, there’s clearly
more that we can do.”

While the reasons behind the market swoon remained unclear,
one senior portfolio manager at a large corporate pension plan
speculated the move could have been set off by an algorithm
responding to a spike in the Japanese yen, first against the
euro, then against the dollar.

That in turn may have touched off computer orders to dump
large amounts of stock more or less instantaneously, the
portfolio manager said.

“That set off a nuclear process of one order banging into
the next and exploding,” he said. “At the end of the day, the
fault lies with poor programming and lack of intelligent human


The Securities and Exchange Commission and Commodities
Futures Trading Commission reiterated that they were examining
the reasons behind the selloff, and “scrutinizing the extent to
which disparate trading conventions and rules across various
markets may have contributed to the spike in volatility.”

There are two issues for regulators and exchanges. One is
to ensure that the same kind of rapid selloff does not happen
again; the other is to determine if someone in the market was
trying to take advantage of the situation.

Even before Thursday’s meltdown, the SEC had been probing
high-frequency trading and the structure of the mostly
electronic marketplace, which has undergone a high-tech
transformation over the past decade.

High-frequency trading, where firms use lightning-quick
algorithms to capitalize on tiny market imbalances, accounts
for an estimated 60 percent of all volumes. Investors and
exchanges have come to rely on those short-term traders to keep
markets flowing.

There was no shortage of proposals to avoid a repeat, and
leading exchanges sniped among themselves over where the blame
lay and what the best solution was.

Nasdaq OMX Group will push for a marketwide circuit breaker
based on individual stocks, Chief Executive Robert Greifeld
said. Duncan Niederauer, chief executive of NYSE parent NYSE
Euronext (NYX.N: ), touted his exchange’s use of a lever that
slows down floor trading.

The New York Stock Exchange’s use of its “mini circuit
breaker” on Thursday afternoon was akin to abandoning its
listed stocks, Greifeld said.

“That signal is a negative signal that there is something
wrong with (NYSE’s) stocks. Instead of standing behind it, they
basically walked away from that,” Greifeld said on CNBC.

Niederauer defended the use of the so-called Liquidity
Refreshment Point, which kicks in at pre-established times
based on market activity.

“We’re simply slowing down the race car when we think it’s
dangerous,” he told CNBC.


The Nasdaq Stock Market early on Friday widened its list of
stocks facing canceled trades, and the focus turned to
derivatives and regulators.

Trades that took place during the worst of the meltdown
have been canceled for more than 250 stocks, Nasdaq OMX said,
adding to the long list of “busted” transactions on NYSE
Euronext’s Arca, other exchanges and trading venues.

A record number of options contracts traded on Thursday.

A handful of high-frequency firms told Reuters they had
temporarily stopped trading on Thursday, citing the heavy
market plunge and uncertainty over which trades would be

“We were concerned there would be trade breaks, and as a
result, we would be left with an unpredictable position at the
end of the day,” said Manoj Narang, CEO of Tradeworx, a New
Jersey-based hedge fund that also runs a high-frequency unit.

Stock Market Money

(Additional reporting by Ross Kerber, Al Yoon, Dan Wilchins,
Pedro Nicolaci da Costa, Matthew Goldstein, Karey Wutkowski,
Margaret Chadbourn, Kevin Drawbaugh, Donna Smith, David Lawder,
Christopher Doering and Roberta Rampton: Writing by Christian
Plumb. Editing by Robert MacMillan and Peter Cooney)

WRAPUP 7-New regulations likely as US probes big stock dive