SEC moves to create new rules while they can't figure out what caused the 1000 point Dow Crash

SEC as is the case with most regulatory agencies, is trying to create more rules to prevent the 1000 point crash that happened on Thursday.From the bureaucrat’s point of view it makes sense .You create more rules which implies a bigger turf for you to play on. They have not figured out what caused the problem but are already considering new rules.The Congress is is the same “Create Rules” boat . The SEC does not have a lot of credibility  in my view.Prevention of Naked Short Selling , Bernie Madoff ,the list of SEC shortcomings is long . Creation of new rules does not resolve the systematic fundamental problems with lack of enforcement of existing rules.The SEC and Congress have not figured out how to deal with the advent of large volumes of quant and high frequency trading.Until they can understand the impact of these changes to the market , just blind shallow rule creation won’t solve problems as seen by Accenture trading at 1 cent.

SEC Said to Consider New Rules as Market Drop Probed – Bloomberg

The U.S. Securities and Exchange Commission is considering regulatory changes aimed at slowing stock trading during periods of cascading prices, even though the agency hasn’t yet concluded what caused this week’s market plunge, two people familiar with the matter said.

SEC officials are weighing whether uniform trading curbs should be imposed across markets for companies that have fallen a certain percentage, said the people, who declined to be identified because the discussions are preliminary. The agency is examining whether any rules should include a time element because a steep decline that occurs in minutes may be more detrimental to markets than a decline over several hours, one of the people said.

U.S. regulators and exchanges are trying to determine what happened after stocks fell May 6, temporarily erasing more than $1 trillion in market value, in a rout fueled by waves of computerized trading. The SEC and Commodity Futures Trading Commission said in a joint statement yesterday that declines for individual stocks were “inconsistent” with well-functioning markets and pledged to make “structural” changes if necessary.

SEC spokesman John Nester declined to comment on internal agency discussions. Lawmakers are pressing the SEC for answers.

“Yesterday’s flash crash was incredibly startling,” Representative Paul Kanjorski said in a statement, announcing a May 11 hearing to examine the incident. “We cannot allow technological problems, regulatory loopholes, or human blunders to spook the markets and cause panic.”

Computer Glitch

Kanjorski, a Pennsylvania Democrat, also sent a letter to SEC Chairman Mary Schapiro seeking the agency’s views on the incident and asking what power it has to prevent future crashes.

While the SEC is in the early stages of reviewing market data, the agency hasn’t found evidence indicating that an erroneous trade or a computer glitch triggered the market rout, one of the people said.

CNBC citied “multiple sources” in reporting May 6 that New York-based Citigroup Inc. may have made a mistake in entering a transaction that contributed to the plunge. Citigroup said it found no evidence it was involved in an erroneous trade, a finding supported by futures market CME Group Inc.

“Based on our review, rumors about a trading error by Citi are unfounded,” said Citigroup spokeswoman Danielle Romero- Apsilos.

Washington Briefing

SEC officials have internally circulated at least two memos outlining market mechanisms suspected of triggering or fueling the market decline, a person familiar with the discussions said.

One memo, circulated two days ago, outlines a scenario described publicly by stock-exchange officials, people who saw the document said. The theory advanced by the other memo couldn’t be determined.

SEC commissioners were scheduled to be briefed on the incident yesterday by the agency’s trading and markets division in Washington, the people said.

One SEC memo, according to people who saw it, discusses a theory raised yesterday by NYSE Euronext spokesman Ray Pellecchia, who said sudden price moves in multiple stocks reached so-called liquidity replenishment points. That prompted the exchange to slow trading in those shares as it tried to ensure an orderly market. Such incidences allow other exchanges to ignore NYSE price quotes.

Uniform Practices

Trades sent to electronic networks then fueled the drop, said Larry Leibowitz, chief operating officer of NYSE Euronext. While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the decline snowballed as orders went to venues lacking liquidity to match them, he said in an interview yesterday.

NYSE competitors such as Nasdaq OMX Group Inc. don’t use liquidity replenishment points. The SEC and CFTC in their joint statement raised concerns that the plunge may have been caused by exchanges not adhering to uniform practices.

“We are scrutinizing the extent to which disparate trading conventions and rules across markets may have contributed to the spike in volatility,” the regulators said. Ideas under discussion would make sure all trading platforms follow the same policies when prices fall precipitously.

A circuit breaker for individual stocks across all markets would avoid the problem of individual markets making their own decisions about trading, said Brett Mock, chairman of the Security Traders Association, a trade group of brokers and asset management companies based in Darien, Connecticut.