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Article posted on 09/08/10
Author: Stacie Schwartz

SEC Considering New Rules to Prevent Another "Flash Crash"

The head of the Securities and Exchange Commission, Mary Schapiro, said the agency is considering new rules on high frequency transactions. The reason behind the rule change is the May 6th "flash crash", when the market plunged dramatically and then recovered in just a few minutes. Lawmakers and investigators looking into the May event suspect that the event was caused by investors who execute thousands of trades within seconds.

Schapiro said that the SEC will consider whether traders with the best access to markets should be obligated to buy and sell stocks to preserve liquidity in a speech delivered at the Economic Club of New York. Also being considered is a rule that would establish a minimum time for stock quotes to stand before they can change. This would prevent high frequency traders from repeatedly placing and canceling orders within milliseconds of eachother.

Ms. Schapiro said she vehemently disagrees with those that call the "flash crash" an aberration and say that the market has adapted to prevent a repeat of the May 6th event. Schapiro says that a comprehensive review of the market's structure is necessary, as well as the implementation of new rules that would prevent a similar occurrence in the market in the future.

The so-called "flash crash" saw the value of US equities plunge $860 billion in under twenty minutes, and regulators have been under pressure ever since to demonstrate they have control of a market dominated by electronic trading. Many have argued that the event occurred primarily because high frequency traders are under no obligations to buy and sell shares during times of severe economic stress.

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