President Barack Obama said U.S. authorities were investigating the cause of a nearly 1,000-point plunge in the Dow Jones industrial average that spooked investors and fueled anger at Wall Street.
The regulatory authorities are evaluating this closely with a concern for protecting investors and preventing this from happening again, and they will make findings of their review public along with recommendations for appropriate action, Obama told reporters on Friday. He referred to the selloff as unusual market activity.
The sudden stocks meltdown stemmed from growing concern about the Greek debt crisis and was widely believed to have been exacerbated by at least one large erroneous trade. It stoked outrage among investors and politicians already up in arms over Wall Street's role in the global recession.
We cannot allow a technological error to spook the markets and cause panic, Rep. Paul Kanjorski said late on Thursday. This is unacceptable. A House of Representatives panel chaired by Kanjorski will examine the causes of the market swoon at a hearing next Tuesday.
The selloff came as Congress debated Obama's proposed regulatory crackdown and, like recent civil fraud allegations against Goldman Sachs Group Inc, could fuel enthusiasm for the legislation.
We should expect the regulators to use every tool available to them to lower the speed limit on financial markets, and especially on banks, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co, told Reuters Insider. You will see regulation, taxation and enforcement all being used.
Many market participants do not know what caused Thursday's meltdown. One senior portfolio manager at a large corporate pension plan speculated that the move could have been set off by an algorithm responding to a spike in the Japanese yen, first against the euro, then against the dollar.
That in turn may have touched off computer orders to dump large amounts of stock more or less instantaneously, the portfolio manager said.
That set off a nuclear process of one order banging into the next and exploding, he said. At the end of the day, the fault lies with poor programing and lack of intelligent human override.
CIRCUIT BREAKER SOUGHT
There was no shortage of proposals to avoid a repeat, but leading exchanges sniped among themselves over where the blame lay and what the best solution was.
Nasdaq OMX Group Chief Executive Robert Greifeld said the exchange aims to take the lead in pushing for a marketwide circuit breaker based on individual stocks, while Duncan Niederauer, CEO of NYSE parent NYSE Euronext touted his exchange's use of a lever that slows down floor trading.
It's a day that no one in the markets should be proud of, said William O'Brien, chief executive of Direct Edge, a trading venue operator that handles more than 10 percent of all U.S. stock trading. While a lot of regulation worked to mitigate the risks that became really evident yesterday, there's clearly more that we can do.
The Securities and Exchange Commission probe will examine any wrongdoing related to the selloff, which at its deepest point wiped nearly $1 trillion off equity values a source familiar with the matter said.
Even before Thursday's meltdown, the SEC had been probing high-frequency trading and the structure of the mostly electronic marketplace, which has undergone a high-tech transformation over the last decade. Some 50 separate trading venues now vie for a growing flood of buy and sell orders.
High-frequency trading, where firms use lightning-quick algorithms to capitalize on tiny market imbalances, accounts for an estimated 60 percent of all volumes. Investors and exchanges have come to rely on these short-term traders to keep markets flowing.
Treasury Secretary Timothy Geithner on Thursday held a conference call with Federal Reserve Chairman Ben Bernanke as well as regulators from the SEC and the CFTC, a source said.
National markets supervisors in the European Union agreed on Friday to intensify monitoring due to wild swings in stock and derivative prices that have rattled investors.
It was the latest salvo from regulators and policymakers who are trying to quell market volatility sparked by fears that Greece's debt woes are spreading.
The Dow industries finished down 348 points, or 3.2 percent, on Thursday. The index fell another 279 points Friday morning but then rebounded, briefly moving into positive territory around midday. There was no sign of the kind of uncontrolled selling that wracked the market on Thursday. In the selloff, stocks like Accenture and Boston Beer plunged to just 1 cent per share.
Greifeld said the New York Stock Exchange's use of its mini circuit breaker Thursday afternoon was akin to abandoning its listed stocks.
That signal is a negative signal that there is something wrong with (NYSE's) stocks. Instead of standing behind it, they basically walked away from that, Greifeld said on CNBC.
Niederauer defended the use of the so-called Liquidity Refreshment Point, which kicks in at pre-established times based on market activity.
We think it's a valuable part of the model, he told CNBC. My guess is regulators will take a look at this and say, if it's just 30 or 60 seconds, no one's walking away. We're simply slowing down the race car when we think it's dangerous.
One bank linked by some investors to the erroneous trade rumors, Citigroup Inc, on Friday said there was no basis for rumors it was responsible for a massive trading error.
'ADJUSTED, NOT BUSTED'
The Nasdaq Stock Market early on Friday widened its list of stocks that will see canceled trades, and the focus turned to derivatives and regulators.
Trades that took place during the worst of the meltdown will be canceled for more than 250 stocks, Nasdaq OMX said, adding to the long list of busted transactions on NYSE Euronext's Arca, other exchanges and trading venues.
The unusual exchange-wide agreement to cancel trades raised questions for futures and options markets, where many contracts are based on underlying stocks and stock indexes.
U.S. options exchanges also broke trades based on underlying equities, although the volume of busted trades was de minimis, said a spokesman at the Options Clearing Corp. A record number of options contracts traded on Thursday.
A handful of high-frequency firms told Reuters they temporarily stopped trading Thursday, citing the heavy market plunge and uncertainty over which trades would be canceled.
We were concerned there would be trade breaks, and as a result, we would be left with an unpredictable position at the end of the day, said Manoj Narang, CEO of Tradeworx, a New Jersey-based hedge fund that also runs a high-frequency unit.
Added another high-frequency trader who requested anonymity: Retroactively breaking trades is a bad idea. What you need is a halt, a small time-out so that people can flip on the news and decide what is the rational level we should be trading at.
(Additional reporting by Ross Kerber, Al Yoon, Dan Wilchins, Pedro Nicolaci da Costa)
(Reporting by Jonathan Spicer in New York and Rachelle Younglai in Washington. Editing by Derek Caney, Steve Orlofsky, John Wallace and Robert MacMillan)