SEC Said to Consider New Rules After Market Plunge

The U.S. Securities and Exchange Commission is considering regulatory changes aimed at slowing stock trading during periods of cascading prices, even though the agency hasn’t yet concluded what caused this week’s market plunge, two people familiar with the matter said.

SEC officials are weighing whether uniform trading curbs should be imposed across markets for companies that have fallen a certain percentage, said the people, who declined to be identified because the discussions are preliminary. The agency is examining whether any rules should include a time element because a steep decline that occurs in minutes may be more detrimental to markets than a decline over several hours, one of the people said.

U.S. regulators and exchanges are trying to determine what happened after stocks fell May 6, temporarily erasing more than $1 trillion in market value, in a rout fueled by waves of computerized trading. The SEC and Commodity Futures Trading Commission said in a joint statement yesterday that declines for individual stocks were “inconsistent” with well-functioning markets and pledged to make “structural” changes if necessary.

SEC spokesman John Nester declined to comment on internal agency discussions. Lawmakers are pressing the SEC for answers.

“Yesterday’s flash crash was incredibly startling,” Representative Paul Kanjorski said in a statement, announcing a May 11 hearing to examine the incident. “We cannot allow technological problems, regulatory loopholes, or human blunders to spook the markets and cause panic.”

Computer Glitch

Kanjorski, a Pennsylvania Democrat, also sent a letter to SEC Chairman Mary Schapiro seeking the agency’s views on the incident and asking what power it has to prevent future crashes.

While the SEC is in the early stages of reviewing market data, the agency hasn’t found evidence indicating that an erroneous trade or a computer glitch triggered the market rout, one of the people said.

CNBC citied “multiple sources” in reporting May 6 that New York-based Citigroup Inc. may have made a mistake in entering a transaction that contributed to the plunge. Citigroup said it found no evidence it was involved in an erroneous trade, a finding supported by futures market CME Group Inc.

SEC officials have internally circulated at least two memos outlining market mechanisms suspected of triggering or fueling the market decline, a person familiar with the discussions said.

Washington Briefing

One memo, circulated two days ago, outlines a scenario described publicly by stock-exchange officials, people who saw the document said. The theory advanced by the other memo couldn’t be determined.

SEC commissioners were scheduled to be briefed on the incident yesterday by the agency’s trading and markets division in Washington, the people said.

One SEC memo, according to people who saw it, discusses a theory raised yesterday by NYSE Euronext spokesman Ray Pellecchia, who said sudden price moves in multiple stocks reached so-called liquidity replenishment points. That prompted the exchange to slow trading in those shares as it tried to ensure an orderly market. Such incidences allow other exchanges to ignore NYSE price quotes.

Trades sent to electronic networks then fueled the drop, said Larry Leibowitz, chief operating officer of NYSE Euronext. While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the decline snowballed as orders went to venues lacking liquidity to match them, he said in an interview yesterday.

Uniform Practices

NYSE competitors such as Nasdaq OMX Group Inc. don’t use liquidity replenishment points. The SEC and CFTC in their joint statement raised concerns that the plunge may have been caused by exchanges not adhering to uniform practices.

“We are scrutinizing the extent to which disparate trading conventions and rules across markets may have contributed to the spike in volatility,” the regulators said. Ideas under discussion would make sure all trading platforms follow the same policies when prices fall precipitously.

A circuit breaker for individual stocks across all markets would avoid the problem of individual markets making their own decisions about trading, said Brett Mock, chairman of the Security Traders Association, a trade group of brokers and asset management companies based in Darien, Connecticut.

The SEC and CFTC said their market oversight units are continuing to review trading data and will make findings public. The SEC’s enforcement division, which investigates violations of securities rules, will also try to determine if market participants exploited the turmoil to profit illegally, two people with direct knowledge of the matter said.

Increased Competition

Increasing competition has eroded NYSE and Nasdaq’s trading volume. Less than 30 percent of transactions in NYSE and Nasdaq listed companies takes place on their networks with orders dispersed to as many as 50 venues. Most rival platforms are fully electronic.

Lawmakers including U.S. Senator Ted Kaufman, a Delaware Democrat, have urged the SEC since last year to increase regulation of markets that rely on computer algorithms to execute thousands of trades in seconds. Kaufman, who has raised concerns about potential manipulation or false trades triggering a crisis, urged the SEC this week to step up its oversight.

“No one knows what is happening in the exchanges when this trading is going on,” he said on the Senate floor May 6 after the market plunge. “All we have been requesting from the Securities and Exchange Commission is that they take a look at what is happening.”

bear market started with the Goldman Sachs news?

What a week it was. In fact the last two weeks completely erased year to date gains on the majority of indices. My XOM and especially MON positions are well under water now, but there is still some months to expiration though. I guess with selling puts, it's a matter of patience. With the VIX now at 40%, I decided to place the following position with my 8K margin left:

sell to open 1 PUT DIA 2010DEC31 67 for $1.15 USD
net premium: $103.80 USD
margin requirement: $6,596.20
strategy used: near all March 2009 lows
probability of success: very high
comments: with Dow Jones closing @ 10,380.43, there is a downside protection of 35.46%, this trade has a high chance of expiring worthless. This is a bet that we will never see those March 2009 lows of 6,440.08 in my lifetime at least.

Stocks Tumble as Debt Concern Spurs Electronic Rout (1000 points decline)

U.S. stocks tumbled the most in a year as waves of computerized trading exacerbated a selloff triggered by Europe’s debt crisis, sparking a slide in Asian shares. U.S. index futures stabilized and the euro climbed.

The rout briefly erased more than $1 trillion in U.S. market value as the Dow Jones Industrial Average fell almost 1,000 points, a 9.2 percent plunge that was the biggest intraday percentage loss since 1987 and largest point drop ever, before paring declines. Japan’s Nikkei 225 Index tumbled 3.5 percent as of 2:47 p.m. in Tokyo and the MSCI Asia Pacific Index slumped 1.9 percent.

Standard & Poor’s 500 Index futures fell 0.4 percent, having earlier gained 0.7 percent, and the euro strengthened 2 percent against the yen after Japanese Finance Minister Naoto Kan said the Group of Seven plans to hold a conference call to discuss the Greek debt crisis. “People are selling in a panic,” said Hisakazu Amano, who helps oversee the equivalent of $22 billion at T&D Asset Management Co. in Tokyo. “Investors will put money back into risk assets when the Greece issues cool down.”

Stocks got pummeled amid concerns European leaders won’t do enough to keep the most indebted nations from defaulting. The losses snowballed as computerized trades sent to electronic networks caused some stocks to briefly drop more than 90 percent of their value. Procter & Gamble Co., the world’s biggest consumer products company, fell as much as 37 percent before recovering all but 2.3 percent of its decline.

‘Unusual Trading’

The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said in a joint statement that they will examine “unusual trading” that contributed to the plunge and two people with direct knowledge of the matter said regulators plan to examine whether securities professionals triggered the selloff or exploited the turmoil for profit.

The Nasdaq OMX Group Inc. said it will cancel trades of stocks that moved more than 60 percent. While the first half of the Dow average’s plunge probably reflected normal trading, the selloff snowballed because of computerized orders sent to venues with no investors willing to match them, Larry Leibowitz, the chief operating officer of NYSE Euronext, said in an interview on Bloomberg Television.

Japan’s Nikkei was set for its biggest slump since March 2009, with companies reliant on European exports leading declines. South Korea’s Kospi Index sank 2.4 percent. Hong Kong’s Hang Seng Index lost 0.7 percent, led by HSBC Holdings Plc, Europe’s largest bank.

Global Declines

The MSCI Emerging Markets Index dropped 1.6 percent to 935.25, extending this week’s retreat to 8.5 percent, the biggest decline since Feb. 20, 2009. The MSCI Asia Pacific Index lost 1.9 percent to 117.61. The gauge joined the MSCI World Index and the Stoxx 600 Index in wiping out its advance for 2010. The MSCI World, which tracks 23 developed nations, lost 0.7 percent, taking a four-day slump to 7.1 percent.

Futures on the S&P 500 fell to 1,117.50. The index fell as much as 8.6 percent, its biggest intraday plunge since December 2008, before closing down 3.2 percent at 1,128.15. The Dow average closed 3.2 percent lower at 10,520.32. It was the biggest percentage drop on a closing basis since April 20, 2009, for both measures.

The euro rose after Japan’s Kan said at a press conference in Tokyo that European members in the G-7 “will probably explain” steps taken with the International Monetary Fund to assist Greece. “I don’t think we will be asked to take specific action, such as currency intervention.”

The euro strengthened to 116.56 yen from 114.32 yesterday in New York, when it reached 110.70, the lowest since December 2001. Europe’s currency climbed to $1.2667 from $1.2620.

Treasuries Fall

Swaps in South Korea show banks are hoarding dollars as Greece’s crisis prompted companies to seek the safety of the world’s reserve currency.

The one-year basis swap, in which two parties exchange floating interest rates for the dollar and the won, widened to minus 152 basis points from minus 106 at the end of last week. A wider negative rate signals that investors are willing to receive reduced won interest payments to obtain dollars.

Treasuries fell, paring the biggest weekly gain in eight months as stock futures rose. The yield on the benchmark 10-year Treasury note rose three basis points to 3.42 percent, according to BGCantor Market Data. The 3.625 percent security due February 2020 sank 7/32, or $2.19 per $1,000 face amount, to 101 22/32. The yield fell 14 basis points yesterday and is down 22 basis points this week.

‘Some Relief’

“There’s some relief in the flight to quality,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas Securities Japan Ltd. The company’s U.S. branch is one of 18 primary dealers that trade government debt with the Federal Reserve.

Copper for three-month delivery on the London Metal Exchange lost as much as 2.7 percent to $6,760 a metric ton, and traded at $6,782. Europe’s debt crisis dragged prices down by 8.7 percent this week.

Yesterday’s declines came after European Central Bank President Jean-Claude Trichet held interest rates at a record low of 1 percent and said the bank didn’t discuss whether to purchase government bonds to stem the region’s debt crisis.

“Nerves are frayed,” said Prasad Patkar, who helps manage about $1.7 billion at Platypus Asset Management Ltd. in Sydney. “After the global financial crisis, it’s not irrational for investors to shoot first and ask questions later. We need the European Central Bank to come out decisively and put a stop to this before things spin out of control. If not, we may find ourselves in a tailspin.”

Regulatory Scrutiny

After the subprime market collapsed, the U.S. government agreed to spend, lend or commit as much as $12.8 trillion to stabilize the financial system.

The S&P 500 fell 1.7 percent through about 2 p.m. in New York when the decline began to steepen. Between 2:30 and 2:45, the index lost another 5.8 percent before bottoming at 1065.79 and starting to rebound.

The SEC and CFTC said they are “working closely” with regulators and exchanges to study the trading. The NYSE told CNBC that there were no system errors as speculation of bad trades swirled through the market.

Citigroup Inc. said it found “no evidence” of erroneous trades after CNBC reported the bank made a potentially bad transaction amid the Dow’s plunge. CME Group Inc., the world’s largest derivatives exchange, said in a statement that Citigroup’s stock-index futures trades didn’t appear irregular or unusual.

Trade Cancellation

The Nasdaq trade cancellation applies to transactions between 2:40 p.m. and 3 p.m. The Nasdaq listed 286 securities that will have trades canceled on its website. The list includes Accenture Plc, Exelon Corp. and exchange-traded funds such as the iShares DJ Select Dividend Index fund.

P&G said it’s looking into electronic trading of its stock to determine whether it was made in error.

The Dow and S&P 500 briefly erased their yearly gains yesterday before paring losses. Bank of America Corp., Hewlett- Packard Co. and American Express Co. tumbled more than 4.3 percent to help lead declines in the Dow as all 30 of its companies dropped at least 1.6 percent. The 998.5-point slide was the Dow’s largest intraday point decrease ever, according to News Corp.’s Dow Jones & Co. unit.

General Electric Co., the world’s biggest maker of jet engines, power-generation equipment and locomotives, fell as much as 17 percent before ending down 4.4 percent. Apple Inc. tumbled as much as 22 percent, the most since 2000, and ended down 3.8 percent.

Stock Options

Technology stocks and industrial companies in the S&P 500 had the biggest intraday declines on record, losing as much as 10 percent and 11 percent, respectively. Both groups ended down less than 3.4 percent.

The benchmark index for U.S. stock options surged as much as 63 percent, the most since February 2007, to 40.7 before paring its advance to 32 percent and closing at an almost one- year high of 32.8. The VIX, as the Chicago Board Options Exchange Volatility Index is known, measures the cost of using options as insurance against declines in the S&P 500.

The S&P 500 moved in an 8.73 percent range between its high and low, the widest since Nov. 20, 2008, when the VIX closed at a record 80.86.

About 19.3 billion shares changed hands on U.S. exchanges, the most since October 2008 and more than double the 2010 average. Almost 10 stocks fell for each that rose on U.S. exchanges.

Greek Bonds

Bonds of debt-laden European nations tumbled yesterday. The yield on Spain’s 10-year note surged 24 basis points, or 0.24 percentage point, to 4.42 percent, the highest since June. Italy’s 10-year yield jumped 22 basis points to 4.27 percent.

The 10-year Greek bond yield surged 1.14 percentage points to 11.31 percent, the highest in Bloomberg data going back to 1998. The nation’s two-year debt surged 1.46 percentage points to 16.36 percent, also a record in Bloomberg data.

German bunds gained, sending the yield premium investors demand to own Greek and Spanish 10-year debt instead of Europe’s benchmark bond to records.

The 110 billion-euro ($140 billion) aid package to avoid a default by Greece has failed to prevent bond yields from rising, driving up borrowing costs for countries including Spain and Portugal. Greece’s parliament approved austerity measures demanded by the European Union and IMF.

‘All About Europe’

Sovereign debt contagion may spread across Europe, affecting the banking systems of Portugal, Spain and Italy, as well as Greece, Moody’s Investors Service said in a report.

“It’s all about Europe,” said Tom Wirth, senior investment officer for Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York. “There’s a perception that what’s going on in Europe will be dragging the region back into a recession. The question is how much of that is going to be contagious to the rest of the world.”

Spain paid the highest yield since 2008 to sell five-year bonds. The Treasury sold 2.35 billion euros of the notes in an auction in Madrid to yield 3.532 percent. That was 0.716 percentage point more than it paid on similar securities in the most recent sale, nine weeks ago.

Prime Minister Jose Luis Rodriguez Zapatero this week railed at investors who dumped Spanish bonds on concern that the rescue plan for Greece may not insulate other euro-region governments from the crisis. The premier is trying to reduce a budget deficit that’s almost four times the European Union’s limit and regain the confidence of fund managers.

IPO Delays

The turmoil battered initial public offerings.

Ron Burkle’s Americold Realty Trust postponed the largest U.S. initial public offering of 2010, while Hong Kong’s Swire Properties Ltd. shelved its sale as the biggest stock-market slump in a year roiled IPOs.

Americold, the warehouse operator owned by Burkle’s Yucaipa Cos., pulled its $660 million sale after slashing the midpoint price by 33 percent yesterday, according to Bloomberg data and a filing with the SEC.

Swire Properties, landlord to Time Warner Inc. in Hong Kong, dropped its plan to raise as much as HK$20.8 billion ($2.7 billion). Smile Brands Group Inc., the Santa Ana, California- based provider of support services to dental groups, also shelved its $132 million IPO today.