The US Securities and Exchange Commission (SEC) is establishing a large trader reporting system in a bid to avoid another stock market flash crash.
On 6 May last year, the Dow Jones Industrial Average plummeted in minutes but it took regulators months to discover exactly what went wrong with trading systems. The crash affected markets worldwide.
The SEC and the Commodity Futures Trading Commission (CFTC) blamed an automated trade execution system. According to the two agencies, the system flooded the Chicago Mercantile Exchange's Globex electronic trading platform with a large sell order. This caused the Dow Jones Industrial Average to plunge by almost 1,000 points in half an hour, wreaking havoc on an already stressed market.
The new SEC system will see large traders - including banks and hedge funds - being required to register with the regulator and having their full trading records being logged against a SEC registration number held by their broker-dealers.
The rule requires traders transacting two million shares or $20 million per day to register. Upon request, the broker-dealers will be asked to supply all transaction details to the SEC as required.
“May 6 dramatically demonstrated the need to enhance the SEC’s ability to quickly and accurately analyse market events. This system will significantly bolster our ability to oversee the US securities markets in a time when trades can be transacted in milliseconds or faster,” said SEC Chairwoman Mary Schapiro.
She said the system would enable the SEC to more easily reconstruct market events, conduct investigations and bring enforcement actions.