U.S. securities regulators are moving ahead with the introduction of single-stock circuit breakers, as the rest of the regulatory community grapples with the fallout from the “flash crash” that occurred in U.S. equity markets on May 6, and other emerging trading issues.

The U.S. Securities and Exchange Commission Thursday approved rules that were proposed in the wake of the brief crash that will require the exchanges and FINRA to pause trading in certain individual stocks if the price moves 10% or more in a five-minute period.

The SEC says that it anticipates that the exchanges and FINRA will begin implementing the new rules as early as June 11.

Other regulators have yet to follow suit, although Canadian regulators have said they are studying the issue and expect to come up with a solution that fits the Canadian market. And, the circumstances that likely led to the flash crash were the focus of a panel discussion at the annual conference of the International Organization of Securities Commissions in Montreal on Thursday.

The “flash crash” of early May has set off alarm bells in world markets


One of the central contributing factors to the crash has been identified as market fragmentation, and the interaction of different market venues and their divergent trading rules. Speaking on the IOSCO panel, Gary Cohn, president & COO of Goldman Sachs Group, Inc., suggested that one of the big problems is that firms that enjoy some of the advantages of acting as market makers (such as direct market access and co-location) don’t share the obligations of genuine market makers to continue to provide liquidity when markets go haywire. He indicated that if these sorts of firms want to continue enjoying these sorts of advantages they should also have the obligation to keep trading when markets are in turmoil, not just when things are rosy.

Also speaking at the same conference, Tom Kloet, CEO of TMX Group, said that one constituency that has been largely ignored in the autopsies of the flash crash is issuers. He indicated that he has heard from a number of issuers that wonder how traders can be allowed to trade their stocks at such wildly impaired prices. Kloet suggested that while adopting added circuit breakers may be an appropriate first step, that doesn’t address the fundamental concern of issuers and the question of the relationship between issuers and markets.

When an issuer lists on an exchange, ostensibly to raise capital, there is a covenant between the firm and the exchange, he said, that includes the expectation that the stock will be traded under the exchange’s rules. However, these rules don’t apply when the same stock is traded on an alternative trading system. He suggested that rules similar to those that prevail when stocks are trading on an exchange should also apply to trading that takes place on ATSs.

Absent that, “we are missing, a little bit, about why our markets exist,” he said. And, he added, regulators should have to answer for the fact that their rules allowed the conditions that created the crash to emerge.

John Lowrey, CEO of alternative trading system, Chi-X Global, said that his firm doesn’t choose to be in the listings business and he doesn’t believe that it shouldn’t be forced to by regulators to get into that business. He also defended market fragmentation as a source of competition for exchanges that have had a trading monopoly in many markets, which imposes a higher cost of capital in those markets, he said.

In a separate panel at the same meeting, Mary Schapiro, chairman of the SEC, noted that in addition to the preliminary step of introducing single-stock circuit breakers (which are being employed on a pilot basis through Dec. 10), it is also studying other possible regulatory responses, including possibly imposing some affirmative obligations on market makers, as well as ways to deal with market orders, and “stub quotes”, among other things.


logo• IOSCO Montreal 2010: Regulators ask if all investors are getting best trading prices
Martin Wheatley, CEO of the Hong Kong Securities and Futures Commission, discusses whether investors are getting the best prices on stock exchanges, market players in Canada, and trading regulation globally. He spoke with Gavin Adamson of Investment Executive at the 2010 International Organization of Securities Commissions conference in Montreal, where he was moderator for a panel on trading regulation. WATCH

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