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'Flash Crash' Panel Calls For U.S. Market Overhaul

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MARY SCHAPIRO
Mary Shapiro, Chairman of the Securities Exchange Commission |

WASHINGTON/NEW YORK (By Roberta Rampton and Jonathan Spicer) - U.S. regulators should stem the growing tide of anonymous stock-trading and consider charging high-frequency traders for their disproportionate amount of buy and sell orders, said a panel of experts advising how to avoid another "flash crash."

The panel's 14 recommendations for U.S. securities and futures regulators contained some bold ideas that, taken together, would overhaul the high-speed electronic trading market.

The advisers on Friday told regulators that today's markets can easily breed uncertainty among investors, and asked them to move urgently on the suggestions.

Yet many of the ideas called only for "consideration" or "further study" -- potentially raising more questions as the first anniversary of the May 6 flash crash nears.

"The recommendations are a good first step ... but from a practical standpoint of avoiding another (crash) in the future, it doesn't go far enough. I don't think it's possible to prevent another one from happening," said Adam Sarhan, chief executive of Sarhan Capital in New York.

U.S. regulators were cautious about some of the boldest recommendations, including new fee structures to encourage liquidity and discourage high numbers of order cancellations.

"I do not know where we as a commission would come down on fees," Securities and Exchange Commission Chairman Mary Schapiro told reporters after the panel meeting on its recommendations.

The unprecedented May 6, 2010, market crash sent the Dow Jones industrial average down some 700 points before rebounding, all in a matter of minutes. It rattled investors, exposed flaws in the structure of markets, and set regulators on a mission to fix the system and restore confidence.

The eight-member panel suggested the SEC consider forcing the banks, hedge funds and others that facilitate stock-trading away from the public exchanges to give investors a better price by a minimum amount.

It also wants regulators to consider a way to better allocate the "costs imposed by high levels of order cancellations, including perhaps requiring a uniform fee across all exchange markets."

That suggestion comes after regulators and others began raising questions this past summer about the massive amount of message traffic, or "noise" in the markets, and whether it allowed some high-speed, short-term traders to manipulate prices for profit gains.

"What market regulation now has to do is limit uncertainty," said Maureen O'Hara, professor of finance at Cornell University and member of the flash crash panel. "You limit uncertainty by limiting the amount of movement a price can have before it falls off the map."

The changes would require the SEC and fellow regulator, the Commodity Futures Trading Commission, to take on a massive amount of research and rulewriting at a time when the agencies are straining to carry out the Dodd-Frank financial reform law.

REGULATORS VS TECHNOLOGY

While some have argued the crash was a freak event that called for obvious adjustments, such as the new "circuit breaker" trading halts, others said it was a wake-up call to finally get a firm handle on what could destabilize capital markets.

It wants regulators to consider a so-called "trade at" order routing rule -- something that would hurt the growing ranks of "dark pools" where trading is done anonymously.

Some 33 percent of U.S. stock-trading takes place away from exchanges, up from 20 percent four years ago. Some of the biggest internalizers are market maker Knight Capital Group Inc, bank Goldman Sachs Group Inc, and hedge fund Citadel.

A "trade at" rule, which Schapiro on Friday expressed support for, would generally prohibit any of the dozens of U.S. venues and wholesale market makers from executing an incoming order unless they were already publicly displaying the best bid or offer in that particular stock.

After the crash, one of the regulators' first steps was to form the committee to come up with some answers.

Many of its ideas fall squarely in the "esoteric" category, though even small adjustments could revamp the flow of tens of trillions of dollars annually in the markets.

The panel wants regulators to consider adjusting trading fees so that firms that provide liquidity get additional rebates that would help stabilize markets during stressful times; "depth of book protection" that would cut down on investors getting poor prices; and a closer look at "disruptive trading activities" in the futures markets.

Other recommendations unveiled on Friday, such as expanding and modifying the "circuit breaker" trading pauses, had been telegraphed by regulators and mostly endorsed by market participants and exchanges such as NYSE Euronext and Nasdaq OMX Group.

The exchanges at the center of the breakdown, however, added a new wrinkle to the debate when in the last week they set off a new wave of planned global mergers, including the takeover of Big Board parent by Germany's Deutsche Boerse.

The mergers highlight the increasingly interconnected global marketplace, where drops in one region can rapidly trigger plunges elsewhere, and show how aggressively traditional exchanges are investing in newer, faster systems.

"The whiz-bang technology in markets today means that when things go wrong, they go wrong very fast," CFTC Commissioner Bart Chilton said.

(Reporting by Sarah N. Lynch, Jonathan Spicer and Roberta Rampton, with additional reporting by Ryan Vlastelica; Editing by Steve Orlofsky, Dave Zimmerman and Tim Dobbyn)

Copyright 2010 Thomson Reuters. Click for Restrictions.

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