The head of the U.S. Commodity Futures Trading Commission urged a regulatory panel to make recommendations, including on price and volume limits for brokered trades, in the wake of the May 6 "flash crash" that has cast doubt on the efficiency of the market.
CFTC Chairman Gary Gensler outlined possible remedies, including expanding the visibility of the order book, or the bid/ask offers that are made public; and reviewing when and under what conditions market halts are put in place.
He asked whether executing brokers should have to adopt certain trading practices when using an algorithm to execute a large order, such as price or volume limits.
"The events of May 6 demonstrate that, in volatile markets, high trading volume is not necessarily a reliable indicator of market liquidity," Gensler told a conference on swap execution facilities on Monday.
The CFTC and SEC Friday said a computer-driven sale worth $4.1 billion by a single trader helped trigger the flash crash, sending the Dow Jones industrial average plunging some 700 points in minutes.
The report did not name the trader, identified in May by Reuters as the money manager Waddell & Reed Financial Inc.
"Once the $4.1 billion order was entered into the algorithm it was as if it was on autopilot. That was it," said Gensler. "One might say it even auto piloted in a ravine."
U.S. regulators have asked a joint panel between his agency and Securities and Exchange Commission to review the report and make recommendations to both agencies.
Gensler suggested increasing the visibility of the full order book, which currently allows traders in futures markets to see up to the tenth offer or bid, might reduce volatility.
Another option, he asked, was to change what causes a pause in the market. On May 6, the E-Mini contract, at the center of the problems that day, stopped trading for five seconds.
Gensler also asked whether cross-market circuit breakers should be adjusted from their current 10 percent limit.
During his speech, Gensler said the flash crash will inform regulators writing rules to implement the Wall Street reform law.
He told the conference the CFTC estimates about 30 to 40 companies will register to trade swaps either as swap exchange facilities (SEFs) or exchanges.
The CFTC and SEC plan to unveil proposed rules for SEFs by the end of the year.
Gensler later told reporters he was "not aware of any material differences" between the SEF proposal from the CFTC and the one expected soon from the SEC. The two agencies "are aligned," he said.
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