Frustrated lawmakers pressed regulators to move faster to pinpoint the cause of the mysterious May 6 market crash, with two weeks of investigation producing few answers.

If they don't know the exact cause, how in the heck do the investors expect to have confidence in the market, said Republican Senator Jim Bunning.

Thursday's Senate Banking subcommittee hearing took place on a day when major U.S. stock indexes closed down nearly 4 percent on fears a European sovereign debt crisis could jeopardize the global economic recovery.

The latest decline was fairly orderly compared to the May 6 swoon than saw the Dow Jones Industrial Average briefly down nearly 10 percent.

Regulators and exchange executives had little new to offer lawmakers. They continue to pursue multiple theories on the cause and look to implement trading pauses for individual stocks during sharp declines, beginning possibly in June.

They don't have a solution yet. It could happen again, Bunning, from Kentucky, told reporters after the subcommittee hearing.

Securities and Exchange Commission Chairman Mary Schapiro defended her agency and said more than 100 SEC staffers were working around the clock, analyzing millions of trades, and probing any wrongdoing.

The SEC is investigating whether market professionals met their obligations, including a requirement to provide clients the best possible trade executions, Schapiro testified.

Fellow market regulator, the Commodity Futures Trading Commission, is examining the activities of large traders and reviewing the role of electronic trading platforms.

CFTC Chairman Gary Gensler told the hearing that the unexplained plunge and the rise of algorithmic trading necessitate a review to determine if further protections are needed in fast-paced, computer-driven markets.

Major U.S. exchanges defended high-frequency trading activities, saying it keeps markets liquid, even though lawmakers' charged rapid traders have an unfair advantage over the average investor.

Regulators have been analyzing more than 19 billion shares traded May 6 and are examining a multitude of factors, including the links between declines in prices of stock index products such as E-mini S&P futures contracts and the use of stop-loss market orders.

Schapiro finds no evidence so far of a big fat finger trade made in error, computer hackers or terrorist activity. But lawmakers were unhappy with the pace of the probe.

It's a couple of weeks after the fact and we still don't know how this even started in the first place, complained Democratic Senator Mark Warner.

Lawmakers also were upset about how trades were canceled after markets closed May 6, including more than 10,000 on the Nasdaq alone. I am very concerned that it undermines market discipline, said Bunning.

The SEC has given major exchanges two weeks to propose clear rules to cancel trades.


The CFTC, as it did last week before a House committee, singled out an unnamed trader, saying the firm sought to hedge its stock portfolio in the futures markets by selling a predetermined amount of futures through an executing broker's automated execution system.

Reuters reported last week that the firm is money manager Waddell & Reed Financial Inc, according to an internal CME Group Inc document that said Waddell sold a large order of E-minis during the May 6 roller-coaster trading.

Gensler said the firm entered its sell orders in a way meant to limit the impact on markets, but because of the extreme volume jump, the firm's trading may have had an unintended market impact.

It took about 21 minutes for the firm to execute its sell order, Gensler said. In markets with average volume, it would have taken significantly longer -- perhaps hours.


U.S. exchanges told the panel that the high-speed trading firms keep markets liquid and functioning, with one suggesting incentives to encourage their participation at stressful times such as the mysterious plunge.

Regulators should consider creating better incentives to provide liquidity during periods of market stress, Nasdaq OMX Group Inc Executive Vice President Eric Noll said in prepared testimony.

High-frequency traders use lightening-fast computer algorithms to make markets and take advantage of tiny imbalances, and are involved in an estimated 60 percent of U.S. stock trading volume. Some big firms stopped trading during the plunge.

The SEC and major U.S. exchanges have proposed new rules to pause stock trading when markets are in crisis.

The restrictions known as circuit breakers would apply to all stocks in the Standard & Poor's 500 index, and initially would exclude exchange-traded funds (ETFs).

The proposal needs approval from the SEC before the rules go into effect. The SEC plans to roll out the rule in a six-month trial period starting around June.

NYSE Euronext expects all U.S. stocks will be subjected to circuit breakers by the end of the year.

(Reporting by Christopher Doering, Kim Dixon, Rachelle Younglai in Washington and Jonathan Spicer in New York, editing by Dave Zimmerman and Tim Dobbyn)