WASHINGTON (AP) — The latest high-tech disruption in the financial markets increases the pressure on Nasdaq and other electronic exchanges to take steps to avoid future breakdowns and manage them better if they do occur.
The three-hour trading outage on the Nasdaq stock exchange Thursday also can be expected to trigger new rounds of regulatory scrutiny on computer-driven trading. Investors' shaky confidence in the markets also took another hit.
Questions about potential dangers of the super-fast electronic trading systems that now dominate the U.S. stock markets are rippling again through Wall Street and Washington. Stock trading now relies heavily on computer systems that exploit split-penny price differences. Stocks can be traded in fractions of a second, often by automated programs. That makes the markets more vulnerable to technical failures.
The Commodity Futures Trading Commission expects to put forward next week a plan for new restrictions and oversight on high-speed trading, a person with direct knowledge of the matter said Friday. The person said the CFTC commissioners haven't yet voted to open the plan to public comment.
U.S. Securities and Exchange Commission Chairwoman Mary Jo White said she will push to adopt proposed automated-trading rules.
The failure that affected Nasdaq's system for reporting quotes and prices bolsters the case to pass a proposal issued in March, White said in a statement. Advancing it will require the regulator to face down opposition by exchanges, which have pushed the SEC to limit the scope of the rule, including how much information about glitches they must be provide.
“I will work to advance rules that the commission proposed earlier this year regarding new standards for the trading and other systems that are central to the integrity of our markets,” White said.
Nasdaq-OMX CEO Robert Greifeld told CNBC on Friday that unspecified, external factors caused the glitch, and that the exchange followed all the proper procedures to correct the problem.
“We all have to be aware of the other person not acting always in the proper way, and you have to have your system be able to handle defensive driving,” Greifeld said. “We're deeply disappointed with what happened yesterday. We aspire to perfection. We want to get to 100 percent up time.”
While hardly as stunning as the “flash crash” that set off a steep and sudden stock-market plunge in May 2010, the Nasdaq disruption — some are dubbing the “flash freeze” — did stir memories of it.
After the 2010 market break, regulators “never really developed a fix for it, and these kinds of things are going to continue to happen,” said Michael Greenberger, a law professor at the University of Maryland who was the top market oversight official at the CFTC in the late 1990s. High-speed trading commanded by mathematical formulas rather than people brings “the possibility of a calamity,” Greenberger said.
Regulators need to slow down automated trading by requiring trades to be placed “with human input,” he said.
The SEC likely will scrutinize Nasdaq's systems and emergency procedures, and could order the exchange to upgrade them if it finds them lacking, said Phil Stern, a former SEC attorney now in private practice. In addition, Nasdaq could face significant financial penalties and other sanctions as a result of the breakdown, Stern suggested.
“The (SEC) is going to have to be satisfied one way or the other that the likelihood of this happening again is extraordinarily remote,” he said.
This report includes information from Bloomberg News.
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