A federal regulator said Thursday his agency is considering new rules governing where high-frequency traders can locate computers in response to the May 6 stock market plunge.
Gary Gensler, chairman of the Commodity Futures Trading Commission, is telling a Senate hearing that the agency may require greater disclosure of the distance between high-speed computers and big exchanges’ data centers. Traders often position their computers close to the data centers, a practice called co-location, which can cut their trade times by milliseconds.
Gensler and Mary Schapiro, chairman of the Securities and Exchange Commission, were appearing at the Senate hearing two weeks after the Dow Jones industrials dropped nearly 1,000 points in less than 30 minutes.
High-frequency traders can make money by exploiting stock indexes that don’t immediately reflect falling or rising prices of their component stocks, experts say. Their critics say split-second trading without human supervision is a recipe for disaster.
The events of May 6 “had significant implications for the investing public and American businesses,” Gensler told the Senate Banking subcommittee. “It is essential that we continue our review of the contributing circumstances of the price volatility, and provide recommendations to promote the integrity of our markets.”
Schapiro said the SEC has received many complaints from investors caught in the market plunge and is looking at actions involving all market players.
She said many complaints came from investors who used so-called “stop-loss” market orders to protect themselves in the market freefall. Stop-loss orders set the price at which a stock is automatically sold when it declines to a specified level.
“I am deeply concerned about the effects that this volatile market had on investors, especially retail investors whose trading orders may not have behaved as they were intended or who otherwise may have been unfairly harmed,” Schapiro said.
Two weeks after the historic market plunge, federal regulators and U.S. securities exchanges are looking to a new plan to require breaks in trading during periods of high volatility.
The question is whether that will work. The big exchanges say that new curbs on trading known as “circuit breakers” will help prevent runaway market drops. But not everyone is convinced. To some market watchers, the rules are too limited. To others, the rules go too far.
The SEC announced Tuesday the new circuit breaker plan, agreed upon with the exchanges. Trading of any Standard & Poor’s 500 stock that rises or falls 10 percent or more within a five-minute period would be halted for five minutes. The rules would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time — nearly the entire trading day.
Source: The Associated Press.