US ‘flash crash’ measures suffer delays

Two years after the “flash crash” on Wall Street, US regulators have still not implemented some of the key measures aimed at preventing further wild swings in stock prices that have harmed market confidence.

Chief among those unfinished proposals is the consolidated audit trail, intended to be a detailed record of millisecond-by-millisecond trading that the Securities and Exchange Commission could turn to for analysis of market aberrations like the 600-point swing in the Dow Jones Industrial Average over 20 minutes on May 6 2010.

“There have been some good interim measures, but the larger, more important items have not yet been implemented,” said Christopher Nagy, head of order routing and market structure at TD Ameritrade, a retail brokerage.

While the SEC acknowledges the urgent need for additional corrective measures, there has not been agreement on details of further proposals, people familiar with the commission’s thinking said. The agency has also been bogged down by rules related to the Dodd-Frank Act. The SEC does not comment on ongoing rulemakings.

The SEC in 2010 adopted new rules such as circuit breakers to halt trade in single stocks when their prices move 10 per cent, and a ban on the stray price quotes that allowed stocks such as Accenture to trade at as little as a penny.

But the circuit breakers have been criticised for creating more trading pauses. An alternative mechanism proposed by exchanges, known as “limit up-limit down” – which would allow more flexibility before trading was halted – has not yet been mooted as a rule by the SEC.

The adoption of an audit trail, which was urged last May by Mary Schapiro, SEC chairman, has also been delayed. The estimated $4bn cost to the industry of the initial proposal attracted much criticism and the SEC’s revised scheme is now expected to cost $1bn. The commission has also backed away from an initial insistence that trading be reported instantly.

The implementation of an interim rule that would force brokers to track trading by large customers has also been delayed by uncertainty about how to process the data.

One area where the SEC is moving forward is on “dark pool” trading, which are markets in which prices are not displayed. The SEC said on Friday that it would extend a review of a January New York Stock Exchange proposal that would allow public exchanges to act as dark pools do, and allow trading at sub-penny increments.

The proposal may give the SEC a way to address flash-crash concerns about liqudiity drying up in off-exchange venues, which have fewer regulatory obligations, during times of market stress.

“The commission’s resolution of these issues could have an impact on overall market structure,” said the SEC.

Volume of trading off-exchange has grown since the flash crash, hitting a record level in the first quarter, at 34 per cent.

Critics have charged that worries about the flash crash, and the role played by automated trading “algorithms” and high-frequency dealing have chased individual investors away from equities.

Since May 6 two years ago, retail investors have pulled $273bn from US domestic equity mutual funds, versus $174bn in the two years prior to the “flash crash”, according to figures from the Investment Company Institute.

The average daily trading volume of US equities was also its lowest in April since December 2007.