6:34 PM
By Rachelle Younglai and Jonathan Spicer
WASHINGTON/NEW YORK | Wed Dec 8, 2010 7:04pm EST
WASHINGTON/NEW YORK (Reuters) - Securities regulators are probing whether traders have intentionally exacerbated volatility or unlawfully exploited the deeply fragmented stock markets, Securities and Exchange Commission Chairman Mary Schapiro said on Wednesday.
A lack of surveillance across the 50 some trading venues, and between the mostly electronic stock, futures and options markets was a clear focus at a congressional hearing into how to avoid a repeat of the May 6 "flash crash."
Since the unprecedented market plunge, the SEC and the Commodity Futures Trading Commission have been under intense pressure to bolster the integrity of the markets now seen by many as flawed and unstable.
SEC enforcement staff are investigating whether market participants "intentionally contributed to market volatility or manipulated the price and volume of securities at the expense of innocent investors," Schapiro told a congressional panel.
Schapiro said her staff was examining trading practices such as "spoofing," which includes when a trader submits many bids and offers with no intention of carrying them out.
The flash crash reverberated across asset classes, rocked investor confidence in the vast trading network and has prompted lawmakers to demand fixes to the markets.
At the hearing, Senator Carl Levin dropped a stack of paper measuring "five inches high" that he said contained the message and trading traffic across all exchanges in one major U.S. stock "over the course of one second."
"There is a long, long way to go particularly with respect to coordinating market protections and surveillance across market venues and across the futures, options, and equities markets," said Levin, who along with fellow Democratic Senator Jack Reed, chaired Wednesday's hearing.
Levin said that coordinated protections across asset classes "isn't even on the drawing board," adding: "It took the CFTC and the SEC five months of intense work to figure out what happened over a few minutes on May 6."
The SEC is painfully aware that it cannot see the entire marketplace or easily collect data from the dozens of trading venues.
The regulator has proposed to improve market surveillance by tracking stock orders across all U.S. equity markets -- a plan generally supported by market participants.
Kevin Cronin, the global head of equity trading at Invesco, told lawmakers that regulators need to be able to analyze the data. Tradeworx CEO Manoj Narang agreed that regulators needed better analytical tools.
"Regulators need to see markets in the same way its most active participants see it," said Narang, whose hedge fund runs high frequency trading strategies.
NOT JUST THEORY
Schapiro and CFTC Chairman Gary Gensler are looking for potential remedies for the markets, where high-frequency algorithmic traders are increasingly dominant.
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