The securities industry on Wednesday will receive proposals to improve record keeping in the stock market and coordinate rules on erroneous trades, two concerns that were highlighted by the May 6 selloff.
The SEC will release a plan to capture all order information in equities, known as a consolidated audit trail, according to a statement on its website. The Financial Industry Regulatory Authority and exchanges will begin work on a policy to determine when trades should be canceled.
“One of the challenges we face in re-creating the events of May 6 is the reality that technologies used for market oversight and surveillance have not kept pace with the technology and trading patterns of the rapidly evolving and expanding securities markets,” SEC Chairwoman Mary Schapiro said in testimony before the Senate Banking Committee on May 20. “A consolidated audit trail would be invaluable to enhance the ability to detect and monitor aberrant and illegal activity across multiple markets.”
Regulators are sifting through as many as 10 terabytes of data on the plunge, which erased $860 billion of market value in less than 20 minutes. The SEC and CFTC proposed six potential causes last week, highlighting connections between futures and equities trading, curbs that applied at the New York Stock Exchange and not elsewhere, and an unwillingness to provide bids and offers by electronic traders.
FINRA and exchanges including NYSE and Nasdaq are developing a policy to decide when trades considered “clearly erroneous” should be broken. The meeting will be Tuesday, Larry Leibowitz, COO of NYSE Euronext, said at the Senate hearings on May 20.
When selling intensified on May 6, U.S. exchanges agreed to break trades that were 60% or more away from their price. Transactions in 326 securities, 70% of which were ETFs, were broken that day. Of the 20,800 separate trades broken, 59% were canceled by Nasdaq, 24% by NYSE Arca, 5% by BATS Exchange and 9% on over-the-counter markets.
Exchange officials had a “significant debate” about where to set the threshold in a conference call after the plunge, according to congressional testimony by Eric Noll, executive vice president for transaction services at Nasdaq OMX Group.