May 8, 2010 in Business

Regulators yet to pin down cause of market’s huge dive

Walter Hamilton And Jim Puzzanghera Los Angeles Times
Associated Press photo

New York Stock Exchange Euronext CEO Duncan Neiderauer, center, is applauded by traders on the floor of the NYSE after a television interview and before the start of trading Friday.
(Full-size photo)

WASHINGTON – As global stock markets skidded further Friday, federal regulators were still scrambling to unravel the cause of a nearly 1,000-point midday plunge in the Dow Jones index a day earlier – an event that triggered new criticism that Wall Street trading has grown too risky and needs to be reined in.

Perhaps the most troubling aspect of the market’s nose dive was that it may have been fueled by a computer glitch, human error or trading programs run amok, and that such technical problems could continue to jeopardize the savings of millions of Americans.

“The New York Stock Exchange told me this could happen again tomorrow,” Rep. Paul Kanjorski, D-Pa., said Friday. “If that’s the case, we’re in a very serious emergency situation.”

Though Thursday’s plunge appears to have been set off by a computer foul-up or an errant trade order, regulators and stock exchange officials were nonetheless struggling to pinpoint the initial tripwire.

“It’s troubling,” said Paul Zubulake, a senior analyst at Aite Group, a research firm. “They should be able to establish if it was an error.”

The Securities and Exchange Commission and the Commodity Futures Trading Commission said they were “devoting significant resources and expertise” to determining the cause and would make their findings public.

“Thursday’s unusual trading activity included extreme volatility for a number of individual securities,” the agencies said in a joint statement. “This is inconsistent with the effective functioning of our capital markets and we will make whatever structural or other changes are needed.”

Initial criticism centered on so-called high-frequency trading in which swashbuckling traders on souped-up computers swap millions of shares a second. Critics say the computers have grown so powerful and lightning-quick that the slightest error can send the market reeling in minutes before human overseers can detect anything amiss.

Critics of high-frequency trading have been warning for more than a year that aggressive new trading strategies were dominating the market and leaving it vulnerable to a major shock.

HFT firms, as they are known, have surged in number and power in recent years, and are now believed to control up to two-thirds of U.S. stock trading volume.

Kanjorski said that the House capital markets subcommittee that he chairs will meet Tuesday to examine what’s become known as the “flash crash,” calling it unacceptable for “a technological error to spook the markets and cause panic.”

The market turmoil, on the heels of the controversial Wall Street bailout and the recent civil charges against investment bank Goldman Sachs, could help rally support for the Obama administration’s financial reform package, some believe.

The sweeping financial regulatory overhaul legislation, now being considered by the Senate, does not directly address high-frequency trading or other automated trading issues. But Sens. Ted Kaufman, D-Del., and Mark Warner, D-Va., want the legislation amended to direct the SEC and the Commodity Futures Trading Commission to study the incident and the broader issue of computer-driven trading.

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