02/18/2011 09:26 am ET | Updated May 25, 2011

Will NYSE's Merger Help Prevent Another 'Flash Crash'?

NEW YORK (By Jonathan Spicer) - The merger frenzy among the world's top exchanges could cast the U.S.-centric "flash crash" debate in a global light, as experts on Friday pitch some possibly radical changes meant to avoid another market breakdown.

A special committee is set to meet in Washington to make its long-awaited recommendations to regulators -- now more than nine months since the unprecedented market crash sent the Dow Jones industrial average down some 700 points before rebounding, all in a matter of minutes.

The May 6 crash rattled investors, exposed flaws in the structure of today's electronic markets, and set regulators on a mission to fix the high-speed system.

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 NYSE Euronext by Germany's Deutsche Boerse.

While the deals could strengthen the oversight of cross-border trading and boost the flow of global liquidity, they also tie the world's interconnected markets tighter together, possibly setting the stage for larger-scale crashes, some observers said.

Seth Merrin, chief executive of market operator Liquidnet, said the U.S. Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission need to coordinate with regulators elsewhere to understand how sharp movements in one country's market can hit derivatives traded in others.

"Nobody as far as I can see has said to all of the other regulators that if you're going to create securities that link to anything in my market, we have to talk," said Merrin, whose venue lets institutional investors trade anonymously.

"I don't know that investors can sustain another flash crash," he said in an interview.

After the crash, one of the first steps taken by the CFTC and the SEC was to strike the committee to come up with some answers. The group includes Financial Industry Regulatory Authority head Richard Ketchum and former CFTC Chairman Brooksley Born, among others.

Robert Engle, an Nobel Prize-winning economist also on the committee, told Reuters that members discussed several possible changes, including giving special rebates that would help stabilize markets during stressful times, and cracking down on the growing amount of trading outside of the public exchanges.

Engle, interviewed earlier this month, said at the time that no final recommendations had been set.

The SEC and CFTC, which hosts the Friday meeting, could formally propose rule changes based on the recommendations. They have already made a handful of adjustments to the marketplace in the wake of the flash crash, including adding trading pauses known as circuit breakers.

In another nod to boosting market security, SEC Chairman Mary Schapiro told a U.S. Senate panel on Thursday the agency asked all exchanges for audits of their security policies, after Nasdaq Stock Market parent Nasdaq OMX Group said on February 5 that hackers had breached its computer systems.

Rounding out the merger activity that caught fire last week, London Stock Exchange bid to buy Canada's TMX Group, and, according to a source, BATS Global Markets is nearing a deal to buy fellow private exchange operator Chi-X Europe. BATS accounts for about 10 percent of all U.S. stock trading.

(Reporting by Jonathan Spicer; Editing by Gary Hill)

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