SEC moves to avoid another market swoon

The rules would apply across all trading venues. The halt in trading would last five minutes.

The proposal, to be implemented in the next few weeks, is a response to several lessons of May 6, when the Dow Jones industrial average plummeted nearly 1,000 points in minutes. Existing “circuit breakers’’ that would normally pause trading were outdated and did not go into effect. And differing rules governing when to stop trading led to irregularities across the market.

“We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges,’’ SEC chairwoman Mary Schapiro said. “I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility.’’

Also yesterday, the SEC and the Commodity Futures Trading Commission released a report citing six theories on what caused the market’s gyrations, saying it was likely a web of speculative trades linked to the direction of the overall market helped fuel the declines.

The regulators’ report sheds little light on which firms, traders, and events caused the volatility. But it underscores how the fate of the stock market is guided largely by speculators making bets on far-flung exchanges that can nevertheless have a big effect on blue-chip stocks.

The events of May 6 — price swings of some stocks defied market fundamentals — eroded confidence in a system already battered by concern about Europe’s debt crisis. The volatility exposed flaws in the electronic guts of the trading system and highlighted the vulnerability to high-speed, computer-driven decisions about what to buy.

A full account may take many months to complete, as it did after the spectacular crash of Oct. 19, 1987, known as Black Monday. While today’s markets are virtually all electronic, making collection of data easier, the amount of data is far larger. In 1987, about 600 million shares were traded daily; on May 6, 19.5 billion shares were exchanged in 66 million trades.

The SEC is looking at several other practices. It is contemplating how to reduce the use of “stub’’ quotes. These quotes allow market-makers — firms that agree to buy and sell shares to ensure that investors can make trades — to technically stay active in the market, as is required by some exchanges.

But the “stub’’ quotes are usually far below or above what the market is asking and are almost never executed. On May 6, trades were executed at “stub’’ prices. Subsequently, exchanges have canceled those trades.

The SEC will also look at whether short-term trading strategies, such as those that use computer analysis to make split-second decisions, need to be curtailed.