WASHINGTON, DC – The stability and integrity of fractured U.S. financial markets will come under scrutiny at a Wednesday, December 8 hearing of two key U.S. Senate subcommittees.
The Senate Banking Committee’s Subcommittee on Securities, Insurance and Investment, chaired by Senator Jack Reed (D-RI) and the Permanent Subcommittee on Investigations, chaired by Senator Carl Levin (D-MI), will hear from top federal financial regulators on issues such as the “flash crash” of May 6 and the need for a modernized regulatory approach to oversee increasingly fragmented and opaque markets.
“A little after 2:40 pm on May 6th, the stock market precipitously plunged over 600 points in less than five minutes and no one could understand why. Theories abounded on everything from cyber-terrorism to hacking to a fat finger. Now investigators have had a chance to extensively examine the causes and we need to carefully consider how to prevent this type of crash from happening in the future. This hearing will focus on the efficiency, stability, and integrity of the U.S. capital markets and examine what tools and resources regulators need to keep up with an increasingly complex and high speed marketplace, that includes high frequency trading and other computerized trading strategies,” said Reed.
“The financial markets are key to jump starting our economy and investing in our nation’s future, but they are now susceptible to market dysfunctions and trading abuses that could jeopardize their stability and investor confidence,” said Levin. “It is urgent that we introduce additional safeguards as well as strengthen oversight of our fractured markets to restore investor confidence.”
U.S. stocks are now traded on 13 public exchanges and over 240 less transparent, off-exchange trading venues. The hearing will examine the extreme high-speed and volume of the transactions on these markets, how traders trade simultaneously in multiple markets at a time, and the inability of regulators to police trading among the markets due to outdated regulatory tools.
The hearing will focus, in part, on causes of the May 6 “flash crash,” in which the Dow Jones Industrial Average plunged nearly 700 points in a matter of minutes. Federal investigators have identified a single computer-programmed trade in the futures market that essentially set off a cascade of computerized selling there and in the options and stock markets to produce the crash in stock prices. Even after that event, and despite the implementation of circuit breakers designed to prevent similar incidents, individual stocks have suffered unexplained drops in value that bring the integrity of markets into question. Still another problem is technology-driven, abusive trading practices that seek to manipulate prices.
The hearing will examine possible solutions to the identified problems, including cross-market and cross-product circuit breakers to stop trading when there is a sudden drop in value; a consolidated audit trail and disclosure of executing broker and customer information to enable regulators to better track transactions; and the integration of trading data from multiple trading venues in the futures, options and equities markets to enable detection of trading abuses that utilize more than one trading venue.
Senator Reed’s subcommittee has already held two hearings examining some of these issues. Wednesday’s hearing will include testimony from Mary Schapiro, chairman of the Securities and Exchange Commission (SEC); and Gary Gensler, chairman of the Commodities Futures Trading Commission (CFTC).
Also testifying at the joint subcommittee hearing will be: Stephen Luparello, Vice Chairman of the Financial Industry Regulatory Authority that conducts market surveillance at major securities markets; and a panel of academic and indsutry experts: James J. Angel, an associate professor of finance at Georgetown University; Thomas Peterffy, CEO of Interactive Brokers; Manoj Narang, CEO of Traderworx; and Kevin Cronin, global head of equity trading at Invesco.