The Securities and Exchange Commission has to get to the bottom of what its chairman, Mary L. Schapiro, called "loose" capital markets on Monday.
"We really have to get to the bottom of fixing the fragmented and loose structure of our markets that contributed" to the "extreme volatility" of May 6, she said.
Schapiro said the commission, through the review of the Concept Release on market structure that it initiated early this year, will have to address "frailties" in electronic markets that led to the kind of 573-point drop in the Dow Jones Industrial Average that happened in a few minutes on May 6, during that day's "Flash Crash."
That "scared investors and we can't have a system here where investors have fears about the integrity of the marketplace,'' said Schapiro. "Terrific U.S. companies,'' she reminded, traded for a penny, if only momentarily, that day.
The SEC has started to address the "frailties" by instituting:
--Circuit breaker rule, where individual stocks that move more than 10 percent in price in five minutes must pause for 5 minutes, while the listing exchange regroups liquidity.
--Trade breaking rule, which, for May 6, meant that any trades that took place at 60 percent above or below a stock's price at 2:40 p.m. that day were broken. That was "cold comfort,'' she said, though, for those who executed trades at 55 percent.
--Naked access rule, instituted last week that requires all trades that any company using a broker's market participant identifier are run through that broker-dealer's risk management controls, before being sent in.
As for getting a firmer grip on "loose markets," she said the Concept Release and its lines of inquiry will get at what the role of algorithms should be, whether there should be throttles on the algorithms depending on market activities and conditions, and the like.
She said the commission is "in the process of laying out a road map" for this that will build on actions already taken. And address questions like:
"How do we deal with algorithms that go crazy and disrupt the marketplace?'' she said.
Without naming the stock or the date, she said one such incident was created by an algorithm that tried to execute trades involving 10 percent of the average daily volume in a particular stock in just two seconds.
That caused a "huge disruption,'' she said.