Mary Shapiro, Chairwoman of the SEC, said that appropriate actions will be taken if any violation of securities laws is identified, in a written testimony to the Senate Banking Committee yesterday.
The SEC is investigating the sharp drop in the Dow Jones this past Thursday May 6th, when the DJIA fell 1,000 points in just a matter of minutes. “If any violation of securities laws is identified, we will take appropriate action,” Ms. Shapiro wrote in her testimony.
The carnage on the NYSE-Euronext, the largest stock exchange market in the world, has raised eyebrows and has raised serious questions about the current functionality of the “circuit breakers”.
Circuit breakers are automated triggers that halt trade execution in a particular stock if the price moves more than 10% between two price quotes. On Thursday, the circuit breakers did not stop any trades from being executed and is probably due to the high volume generated by HF or High Frequency trades, which are computer generated through algorithm based models.
The consequences of such failure are unimaginable for small investors, who place their trades with market makers and traders and are typically stop-loss orders that are meant to protect the investor from any further loss due to a significant market drop. In this scenario such trades ended up being executed at the very bottom of the market causing a 60% loss compared to the subsequent recovery and closing prices.
The SEC has received over 100,000 complaints and has triggered not only an investigation but has also led to the implementation of a pilot program to protect investors in the future.
The pilot program, which will be voted into regulation on May 26th, will be implemented on June 15th and will apply to all US stock markets. The new and improved circuit breaker program will be active between 9:30am EST and 3:30pm EST and will halt trading if the stock price moves more than 10%.
The security measure will not only apply to stocks but also ETF (Electronic Traded Funds) and may well be applied beyond the S&P 500.
SEC's new plan will be in effect for 6 months, but according to an anonymous source, will stay in effect indefinitely. Ms. Shapiro’s office could not be reached for further comments and an attempt to reach Duncan Niederauer, CEO of NYSE-Euronext, who spoke at a financial conference in Shanghai, did not return phone calls.
Written by Nick Doms © 2010, all rights reserved.
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