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SEC eyes new rules in wake of ‘flash crash’

Tells Senate panel of tighter scrutiny to canceled trades

Mary Schapiro, chairwoman of the Securities and Exchange Commission, with Gary Gensler, chairman of the Commodity Futures Trading Commission, at yesterday’s Senate hearings. Mary Schapiro, chairwoman of the Securities and Exchange Commission, with Gary Gensler, chairman of the Commodity Futures Trading Commission, at yesterday’s Senate hearings. (Andrew Harrer/Bloomberg News)
By Marcy Gordon
Associated Press / May 21, 2010

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WASHINGTON — The Securities and Exchange Commission will propose new rules covering cancellation of trades in the wake of the May 6 stock market plunge, the agency’s chairwoman told a Senate panel yesterday.

Nearly 21,000 trades were canceled because exchanges deemed them erroneous after the “flash crash,’’ which sent the Dow Jones industrial average down nearly 1,000 points in less than 30 minutes. Many retail investors were affected, and senators pressed at the hearing for remedies.

“The rules have got to have clarity,’’ SEC chairwoman Mary Schapiro said. “You’ve got to provide certainty up front.’’

Schapiro said the agency is examining whether decisions to cancel trades were made fairly and if market professionals fully met their legal obligations to investors.

The agency will put together new rules governing broken trades in the next few weeks, Schapiro told the Senate Banking subcommittee on securities.

“It’s hard for me to understand . . . how any trades can be broken arbitrarily by an exchange,’’ said . Senator Jim Bunning. “That is unfair; it undermines market discipline.’’

The panel also heard from executives from the major exchanges.

Those executives will discuss a plan with the SEC next week that will provide a clearly defined standard of when trades should be canceled, said Eric Noll, an executive vice president of Nasdaq OMX Group.

Gary Gensler, chairman of the Commodity Futures Trading Commission, said his agency is considering new rules governing the high-frequency traders that position their powerful computers close to the big exchanges’ data centers. The practice, called co-location, can cut the speed traders’ times by milliseconds.

High-frequency traders can make money by exploiting stock indexes that don’t immediately reflect falling or rising prices of their component stocks, experts say.

Their critics say split-second trading without human supervision is a recipe for disaster.

The new proposed rules would take effect in mid-June under a six-month pilot program.