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SEC eyes flash crash reforms

By Sarah N. Lynch

WASHINGTON (Reuters) - Securities regulators are eyeing a spring target to unveil market structure reform proposals in the wake of the May 6 flash crash, Securities and Exchange Commission Chairman Mary Schapiro said.

Schapiro said on Friday the agency is looking at a variety of areas, from new market-making obligations for high-frequency traders to a new limit up/limit down trading parameters.

She also said the SEC is broadly looking into the rules surrounding securities offerings to see if the agency's regulations may be out of date.

The SEC's interest in the issue comes amid reports last month of Goldman Sachs's creation of a special investment vehicle to offer its clients a chance to invest in Facebook.

The SEC has also recently sent information requests to SecondMarket, an online platform to match buyers and sellers in privately held companies such as Facebook and Twitter.

Federal securities laws force companies to publicly disclose more financial information if they have 500 investors. But Goldman's special vehicle would only count as one investor, allowing it to skirt the 500-investor rule.

Schapiro declined to comment specifically when asked about the 500-investor rule but said, "broadly we are looking at whether our rules are keeping up with the changes in how markets are functioning."


Regarding market structure, Schapiro said more work needs to be done to shore up investor confidence and transparency amid advances in high-speed trading.

"We are examining trading or other obligations that might be required of today's de facto market makers: the high-frequency traders," said Schapiro during remarks at SEC Speaks, a conference hosted by the Practising Law Institute.

"We are asking if these firms should be subject to an appropriate regulatory structure, including with respect to their quoting and trading activities."

The SEC has already taken several steps to respond to the flash crash event, where the markets plunged roughly 700 points before staging a partial recovery.

The SEC worked with exchanges to implement single-stock circuit breakers to help put the brakes on market volatility. The agency also outlined parameters for how to break clearly erroneous trades and banned stub quotes that are priced well off the public price of stocks.

Even before the flash crash, the SEC published a list of market structure areas it wanted to explore for potential reforms.

But Schapiro said on Friday that the agency is considering more fixes.

She suggested one proposal could establish limit-up/limit-down trading parameters in which "trades would have to be executed within a range tied to recent prices for the security."

She also said the SEC is concerned about the potential problems that can stem from computer trading models that may cause market disruptions. A joint report by the SEC and the Commodity Futures Trading Commission previously found that an algorithmic trader in the futures market may have helped spark a massive sell-off that spread into the stock market.

"Given the potential for trading algorithms to cause severe trading disruptions and shake investor confidence, we also are considering whether they should be subject to appropriate rules and controls," she said.

She later told reporters she hopes to get some proposals out for comment this spring. She added that market structure issues are highly complex and interrelated, and she hopes to "create a road map" so the SEC can see how various components fit together.

Schapiro made her comments just a few weeks before a joint advisory committee to the SEC and the CFTC are expected to convene in Washington where they may discuss potential recommendations for regulators.

(Reporting by Sarah N. Lynch; Editing by Phil Berlowitz)