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SEC aims to prevent another plunge

Marketplace Staff May 18, 2010
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SEC aims to prevent another plunge

Marketplace Staff May 18, 2010
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Kai Ryssdal: Along those lines, this was another triple-digit day for the Dow Industrials — on the downside this time. Of course, a 100-point loss is better than that 1,000-point yo-yo the Dow took us on a week or two ago. The Securities and Exchange Commission is expected to announce new market rules some time soon that will hopefully help prevent another flash crash.

From Washington, Marketplace’s Nancy Marshall Genzer has more.


Nancy Marshall Genzer: The SEC is going to start its reforms with individual stock fluctuations and then move on to whole exchanges. First, trading in any one of the 500 biggest stocks would be programmed to stop if a stock rose or fell by 10 percent in five minutes.

Lynn Turner is a former chief accountant at the SEC. He says when a stock hits that level…

Lynn Turner: Then, bam, it’ll automatically kick in.

The SEC is expected to unveil the new rules for exchanges soon. They’ll also apply to stock futures. During the flash crash, markets didn’t have uniform circuit breakers. Each exchange had its own rules. Manual traders had one set of rules and the electronic exchanges had another. And the Dow didn’t fall quite far enough to trigger those existing circuit breakers. But there’s a question about how much good any circuit breakers can really do.

Ken Kuttner teaches economics at Williams College.

Ken Kuttner: How do you design these circuit breakers in such a way that they have the desired effect of reducing volatility rather than, by stopping trading, making prices fall even further?

And prices can fall really far, really fast with electronic trading. Computerized trading systems are simply programmed to buy or sell at a certain price. They don’t take a company’s fundamental health into account.

Rajiv Sethi is an economist at Columbia University. He says that’s what’s dangerous about these trades — they cause a lot of volatility.

Rajiv Sethi: This, to me, is a recipe for instability. If there’s too many people trying to use prices to guess at where prices are going to go, you’re going to have instability no matter what.

Sethi says automatic computer trading can cause a stampede of selling until circuit breakers kick in. A stock could go from, say, $40 to one cent a share — in 20 minutes. That’s what happened to Accenture during the flash crash.

In Washington, I’m Nancy Marshall Genzer for Marketplace.

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