US regulators are considering sweeping measures to prevent a repeat of the so-called “flash crash” of 6 May, when the Dow Jones sparked panic by falling 1,000 points in 45 minutes.
The Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC) may extend upward and downward limits on stock movements. In June, the SEC approved rules to suspend trading in S&P 500 shares which see a 10 per cent swing in price during a five-minute period. The restrictions could be applied to securities from other indices. The authorities are also mulling a ban on “stub” quotes used by market makers.
Mary Schapiro, chairman of the SEC, announced the possible steps at a hearing to discuss the freak financial event three months ago. The crash saw around 55 stocks on the S&P 500 dive precipitously in the space of minutes before climbing back to their normal levels. Among those affected were Accenture, whose price plunged from $40 per share to one cent, and Procter & Gamble, which lost 35 per cent of its market value.
The SEC and CFTC taskforce will deliver a report addressing the occurrence early next month. Some members warned a similar lightning bolt could strike again. CFTC commissioner Michael Dunn said: “One thing really struck me today... what happened on 6 May can happen again. In fact, [people] expect it to happen.”
One senior Democratic senator, Charles Schumer, called on the panel to force market makers to step in and provide liquidity at times of rapid, unexpected price declines.
FAST FACTS | FLASH CRASH
High frequency trading, whereby computer algorithms transact large volumes of shares in split seconds, has been seen as a possible cause.
The four main US public exchanges now have “circuit breakers” on S&P 500 stocks.