U.S. regulators should stem the growing tide of anonymous stock-trading and consider charging high-frequency traders fees for the disproportionate amount of orders they send into the marketplace, said a panel of experts advising how to avoid another "flash crash."
The report laying out 14 recommendations for the Securities and Exchange Commission and Commodity Futures Trading Commission contains some fresh ideas.
Taken together they would significantly overhaul the high-speed market that has gone almost completely electronic in the last decade.
However, the changes would require the SEC and CFTC to take on a massive amount of rule-writing, at a time when the agencies are straining to carry out the Dodd-Frank financial reform law.
Also, some market participants doubted even dramatic structural changes could stop another flash crash at times of high investor fear.
"The recommendations are a good first step ... but from a practical standpoint of avoiding another one in the future, it doesn't go far enough. I don't think it's possible to prevent another one from happening," said Adam Sarhan, chief executive of Sarhan Capital in New York.
The unprecedented May 6, 2010, market crash sent the Dow Jones Industrial Average down some 700 points before rebounding, all in a matter of minutes.
It rattled investors, exposed flaws in the structure of markets, and set regulators on a mission to fix the system and restore confidence.
The eight-member panel suggested the SEC consider forcing the banks, hedge funds and others that trade stocks outside of the transparent exchanges to provide a minimum level of price improvement.
It wants regulators to consider a "trade at" order routing regime — something that would hurt the growing ranks of "dark pools" where trading is done anonymously.
While some have argued the crash was a freak event that called for obvious adjustments, such as the circuit breakers, others said it was a wake-up call to finally get a firm handle on what could destabilize capital markets.
"In this new trading environment, market structures and regulation have to be more forward looking, with rules and regulations designed on an ex ante basis rather than an ex post basis," said the panel, which includes Financial Industry Regulatory Authority head Richard Ketchum and former CFTC Chairman Brooksley Born.
The panel also wants regulators to consider a way to better allocate the "costs imposed by high levels of order cancellations, including perhaps requiring a uniform fee across all exchange markets."
That suggestion comes after regulators and others began raising questions this summer about the massive amount of message traffic, or "noise" in the markets, and whether it allowed some high-speed, short-term traders to manipulate prices for profit gains.
Other recommendations unveiled on Friday, such as expanding and modifying the "circuit breaker" trading pauses, had been telegraphed by regulators and mostly endorsed by market participants and exchanges such as NYSE Euronext and Nasdaq OMX Group.
"The whiz-bang technology in markets today means that when things go wrong, they go wrong very fast," CFTC Commissioner Bart Chilton said.
"We need assurances that computer trading programs have been tested with an eye toward the possibility of them roiling markets and that there is accountability if they do."
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