Securities and Exchange Commission Chairman Mary Schapiro said on Tuesday it would take time to pinpoint the cause and warned that investor confidence could suffer if there were no reforms.
The markets failed many investors on May 6, and I am committed to finding effective solutions in the very near term, she said in testimony to the U.S. House of Representatives Subcommittee on Capital Markets.
Schapiro reiterated an agreement with major exchanges to strengthen trading curbs in response to large market moves but gave no time frame for when the new restrictions would be implemented.
With U.S. stock markets back near levels before the May 6 debacle, many lawmakers appeared satisfied with the SEC and fellow market watchdog, the Commodity Futures Trading Commission.
After hearing the testimony from our two regulators I feel a lot more secure, said Paul Kanjorski, the Democrat from Pennsylvania who chairs the subcommittee.
But some Republican members of the committee questioned the wisdom of regulators taking action before the causes of the market roller coaster were clear.
Although Schapiro gave greater weight to theories that a confluence of events were responsible, no regulator or exchange has provided a full account of events or concluded what caused a lightning-fast 700-point drop in the Dow Jones Industrial Average that rattled investors worldwide.
The sudden evaporation of meaningful prices for many major exchange-listed stocks in the middle of a trading day is unacceptable and clearly contrary to the vital policy objective of maintaining fair and orderly financial markets, she said.
CFTC Chairman Gary Gensler said his agency asked some traders for all communications and positions related to E-mini Standard & Poor's 500 futures contracts. That suggested a more muscular thrust in the complicated probe, and bolstered industry rumors circulating around that contract over the last five days.
Schapiro and Gensler both said that computer-driven high frequency trading (HFT) strategies may have exacerbated the sell-off when some of those firms stopped making markets in stocks and futures contracts.
But the regulators were unclear about how much of the 10-minute market plunge could be attributed to HFT firms temporarily turning off their machines.
Some lawmakers pounced on the rapid traders. California Democrat Brad Sherman questioned whether the fast traders should be subjected to a small tax.
The House has already passed a financial regulation reform bill in response to the recent financial crisis. The Senate is currently debating its own version.
Nasdaq OMX Group Inc said its internal analysis found no system malfunction or errant trade.
NYSE Euronext said the market's failure stemmed because the other trading venues did not follow the Big Board's circuit breakers.
Schapiro said more than 100 SEC employees were probing last week's events and said some of staff were now on site at all major markets to monitor trading conditions.
Regulators were sifting through more than 17 million trades in listed equities in the hour beginning at 2 p.m. EDT on May 6, said Schapiro. She cited the growth of trading in multiple markets over the past few years for the complexity of the probe.
But in some preliminary observations, Schapiro sounded skeptical that a large erroneous trade, the so called fat finger scenario, had triggered the brief stock rout.
Schapiro also said there did not appear to be any unusual trading in Procter & Gamble Co's stock ahead of the decline. Nor had any computer hacker or terrorist activity been identified.
The drop in stocks followed the drop and recovery in the value of the popular E-mini contracts, but Schapiro said the fact that stock prices follow futures prices does not demonstrate what may have been the trigger.
Gensler said his agency's inquiries showed the 10 largest traders in those E-mini contracts were on both sides of the market, providing liquidity, during the May 6 events, and clearing and settlement worked effectively and without incident.
Gensler and Schapiro said they would publicly disclose preliminary findings next week.
EXCHANGES MULL NEW CIRCUIT BREAKERS
Under pressure from the SEC and the Obama administration, the exchanges have had to reconcile most of their differences and come up with ways to address their disparate trading systems.
On Monday, the heads of major exchanges and the SEC agreed to strengthen existing market-wide circuit breakers, develop uniform safeguards for individual stocks and come up with clear rules on erasing erroneous trades.
One person familiar with the discussions said the major exchanges are considering a new circuit breaker for stocks listed on the Standard & Poor's 500 index that would trigger a pause in trading if an individual stock fell more than 10 percent in a five minute period.
In the hours after the May 6 market swoon, backbiting initially broke out among the exchanges. The sniping has since largely died down as the main market venues propose reforms that they believe they can live with.
CME Group Inc, the world's biggest futures exchange operator, said there needed to be better coordination across futures, securities and options markets.
NYSE said regulators should require all trading venues use a coordinated mechanism to pause trading.
Nasdaq suggested halting trading for 15 minutes when the Standard & Poor's 500 index drops by 5 percent; for an hour when it drops 10 percent; and for the rest of the trading day when there is a 20 percent drop.
Currently, circuit breakers exist for broader market drops and are tripped at the 10-percent and 20-percent thresholds.
Both the Dow Jones Industrial Average and S&P never reached the crucial trigger point on May 6. The Dow fell as much as 9.2 percent and the S&P was off as much as 8.6 percent during the latter half of Thursday's trading day.
(Reporting by Jonathan Spicer and Matthew Goldstein in New York, Rachelle Younglai, Roberta Rampton, Christopher Doering, Kim Dixon, and Phil Wahba in Washington, and Ann Saphir in Chicago; editing by Tim Dobbyn)