Panel moots new rules on high-frequency trading

A trader works on the floor of the New York Stock Exchange moments before the closing bell in New York City.

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Kai Ryssdal: If you plan to play the stock market at some point in the future, here's a term you might want to know: Limit up, limit down.

That's one of the recommendations today from the government panel looking into last year's flash crash -- May 6th -- when in the space of mere minutes the Dow Industrial lost 900 points and then just as quickly bounced back. The idea of a "limit up, limit down" rule would be to keep stock prices from moving so far out of whack that they set off the kind of panic selling we saw during those stomach-churning moments last May.

Our senior business correspondent Bob Moon has more.


Bob Moon: Wall Street was founded on the notion that public bidding is the best way to discover a stock's true value.

Patrick Healy: The problem is, every once in a while, you're going to get a crazy quote.

Pat Healy is a leading corporate advisor on stock market issues. He says the occasional low-ball bid has caused some stocks to experience their own "mini-crashes" in recent months -- accidentally, or maybe not.

Healy: Sometimes it's a fat finger, and sometimes it's somebody fishing for a great price.

So the flash-crash committee is recommending a new system aimed not just at trying to slow down a market "avalanche." If the panel's "limit-up, limit-down" idea is approved, Healy says it would prevent such a pricing slide before it starts.

Healy: There'll be a band, a percentage band, around the stock. And if a quote comes in for a buy or a sell outside of the band, it'll be rejected by the system, rather than stopping trading in the stock.

Other recommendations are aimed at disproportionate orders coming from computerized "high frequency" traders. They could be slapped with per-trade fees that can add up on high volume.

At Woodbine Associates, market consultant Matt Samuelson says it's feared their heavy order flow can distort pricing.

Matt Samuelson: High-frequency traders use these types of orders and cancel frequently to sort of assess where the market is.

He says much of that is simply probing prices, with no real intention to trade.

Dennis Kelleher, who heads the D.C.-based watchdog group Better Markets, says it's about time for Washington to do more.

Dennis Kelleher: Now here were are, February 18th of 2011, and we get recommendations on an event that happened on May 6th of last year.

Kelleher says he believes regulators are trying to build on the changes they made right after the flash crash. But he worries they're underfunded and understaffed. The head of the Commodity Futures Trading Commission, Gary Gensler, said today his agency won't be able to protect the American public without additional funding.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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