Obama: Feds looking into stock market plunge

By Patrick Rizzo and John Schoen
|  Saturday, May 8, 2010  |  Updated 1:45 AM EDT
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WASHINGTON - President Barack Obama said Friday that regulatory authorities were probing one of the wildest trading days in Wall Street history that left investors, government officials and traders scratching around for a cause.

"The regulatory authorities are evaluating this closely with a concern for protecting investors and preventing this from happening again and they will make findings of their review public along with recommendations for appropriate action," Obama said in remarks from the White House Rose Garden on the nation's employment situation.

A computerized sell-off sent the Dow Jones industrial average plummeting by a near-record 1,000 points within about a half-hour Thursday afternoon. Fear that the European debt crisis could spread was a factor. The market regained two-thirds of that loss before the end of trading.

Reuters said Friday the Securities and Exchange Commission has launched an investigation into Thursday's stock market plunge. It attributed a source familiar with the matter.

On Thursday, the SEC and fellow market watchdog the Commodity Futures Trading commission said they were working closely with other regulators and exchanges to review the unusual trading activity.

In an investigation, the SEC would look for any wrongdoing that may have been related to the stock market drop.

Geithner, Bernanke spoke
A source told Reuters that Treasury Secretary Timothy Geithner held a conference call Thursday with Federal Reserve Chairman Ben Bernanke and officials at the SEC and the CFTC.

There's still no clarity over what exactly happened and that uncertainty was affecting trade on Friday too. Stocks were seesawing despite news that the U.S. economy created a higher-than-expected 290,000 jobs in April, the largest monthly increase in four years.

Some market experts said Friday that the fault lies in problems related to a "go slow," stock-by-stock circuit breaker mechanism at the NYSE that was instituted in 2006. When the market moves “too fast” the mechanism allows specialists in each stock to take the wheel and slow trading down to human speed. The trigger is something called a "liquidity replenishment point" or LRP, which is different for each stock.

Once the LRPs were tripped, executions at the NYSE posts slowed dramatically, with trades taking as much as 30 to 60 seconds to clear. But high frequency traders may have kept trading around the mechanism. And because they were trading into an extremely thin market, bids collapsed.

 

That sent computers looking to fill trades at any price, no matter how low.

"(The New York Stock Exchange) did not call a halt, but they basically walked away from the stock," Bob Greifeld, CEO of NASDAQ, told CNBC. "So that lack of liquidity in the trading of their stocks such as P&G or Accenture in that nervous period of time had a disproportionate affect on terms of what happened with the stocks."

NYSE Euronext CEO Duncan Niederauer defended the exchange's policy of slowing trading in individual stocks. The problem, he said, arose because electronic trading platforms don't follow the Big Board's lead when it imposes the "circuit breakers" on individual stocks.

"Let's stop the finger-pointing," he told CNBC. "There's no walking away. There's no abandoning our obligations. We've had a market model in place for years that includes exactly what Bob is advocating for, which is a circuit breaker stock by stock."

Canceled trades
Reuters said trades that took place during the worst of the meltdown will be 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.

The unusual exchange-wide agreement to cancel trades in stocks raised questions for futures and options markets, where many contracts are based on underlying stocks and stock indexes.

U.S. options exchanges also broke trades based on underlying equities, although the volume of busted trades was "deminimis," said a spokesman at the Options Clearing Corp. A record number of options contracts traded on Thursday.

At least one high-frequency trading firm said it stopped trading during the worst of the selloff, raising questions about the reliability of the all-electronic market-makers that provide much liquidity in today's markets.

Whatever the cause of Thursday's wild ride, the stock market sell-off will be examined by a congressional subcommittee at a hearing Tuesday, said U.S. Representative Paul Kanjorski, chairman of the panel, Friday.

 

"The financial market's dramatic swing was incredibly startling," Kanjorski, head of the capital markets subcommittee of the House of Representatives, said in a statement.

"Reports have surfaced that much of this movement was potentially as a result of a computer glitch. We cannot allow a technological error to spook the markets and cause panic. This is unacceptable."

He said the SEC must look into the matter. "Additionally, my subcommittee will hold a hearing to examine this issue," he said.

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