The top U.S. securities regulator said no single event had been found to explain Thursday's mysterious market plunge but the events were unacceptable and additional safeguards were coming.
U.S. Securities and Exchange Commission Chairman Mary Schapiro said it would take time to pinpoint the cause but reiterated an agreement with major exchanges to strengthen trading curbs in response to large market moves.
In prepared testimony for a congressional hearing later on Tuesday, Schapiro said SEC staff were now on site at all major markets to monitor trading conditions.
The markets failed many investors on May 6, and I am committed to finding effective solutions in the very near term, she said in written testimony to the House Subcommittee on Capital Markets.
Schapiro said regulators were still sifting through more than 17 million trades in listed equities in the hour beginning at 2 p.m. EDT on May 6, and 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.
She gave greater weight to theories that a confluence of events were responsible, but had come to no conclusion.
Schapiro also said there did not appear to be any unusual trading in Procter & Gamble Co's stock ahead of the decline. Speculation was that large trades in Procter & Gamble may have triggered the broader sell-off.
The drop in stocks followed the drop and recovery in the value of the E-mini Standard & Poor's 500 futures contracts, but Schapiro said the fact that stock prices follow futures prices does not demonstrate what may have been the trigger.
Commodity Futures Trading Commission Chairman Gary Gensler also downplayed the role of the E-mini contracts in his prepared testimony.
Gensler said his agency's inquiries showed the 10 largest traders in those contracts were on both sides of the market, providing liquidity, during the May 6 events, and clearing and settlement worked effectively and without incident.
Under heavy 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.
Nasdaq OMX Group Inc said an internal analysis found no system malfunction or errant trade, adding in prepared testimony to lawmakers that it backs adjusting an existing market-wide circuit breaker that halts trading.
NYSE Euronext, in prepared remarks to the panel, said regulators should require all trading venues use a coordinated mechanism to pause trading. CME Group Inc, the world's biggest futures exchange operator, said there needed to be better coordination across futures, securities and options markets.
Backbiting initially broke out among the exchanges as they blamed one another in the hours after the shock trading jolt, but the sniping has since died down as the main market venues propose reforms that they believe they can live with.
Sources said new circuit breakers to halt precipitous drops in individual stocks is a done deal.
Circuit breakers have emerged as a key solution despite the dearth of answers. While breakers exist for broader market drops, those were not breached on Thursday.
Any new breakers would likely trip when individual stocks fell by a set amount in a set time frame. The source requested anonymity because the discussions between regulators and exchange operators are private.
Nasdaq OMX 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, the breakers 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.
The SEC hosted a meeting Monday with the heads of major exchanges, and said afterward the parties agreed to a framework that would strengthen circuit breakers and safeguard markets from such chilling drops.
But the exchanges still have some differences.
Nasdaq OMX said in its testimony that the E-Mini was a factor in the plunge.
But CME Executive Chairman Terrence Duffy disagreed, and said the E-Mini contract was liquid during the plunge and that the futures markets functioned properly.
Schapiro and Gensler were due to appear with exchange executives before the subcommittee beginning at 3 p.m. EDT.
Also scheduled to appear are NYSE Euronext Chief Operating Officer Lawrence Leibowitz, CME's Duffy, Nasdaq OMX Transaction Services Executive Vice President Eric Noll, and Robert Cook, the director of the SEC's division of trading and markets.
(Reporting by Jonathan Spicer in New York, Rachelle Younglai, Kim Dixon, Phil Wahba in Washington, and Ann Saphir in Chicago; editing by Tim Dobbyn)