During a 20-minute period during the afternoon of May 6, the U.S. financial markets failed to live up to their essential price discovery function. That period of gyrating prices directly harmed those investors who traded based on flawed price discovery signals, and it undermined the confidence of investors in the integrity of the markets. We are committed to taking all necessary steps to identify causes and contributing factors and are already working to reduce the likelihood of a recurrence of that day.
This commentary is an excerpt of SEC Chairman Mary Schapiro’s testimony today before the Senate Subcommittee on Securities, Insurance and Investment.
Over the last fourteen days, the SEC has focused intensely on moving forward on two separate, but related, fronts. First, we, along with the Commodity Futures Trading Commission (CFTC), have been engaged in a comprehensive investigation into the events of May 6 to gain a full understanding of what caused the volatility. Second, even as we work to understand the causes of the volatility, we have worked with the exchanges to fashion effective measures that will operate to help protect against a recurrence by imposing a limit on the extent to which prices can move in individual stocks before there is a pause in trading. We are also addressing a number of additional areas that may have contributed to the volatility. These are discussed below.
With respect to our investigation, this past Tuesday, SEC and CFTC staff issued a joint report of their preliminary findings regarding the market events of May 6 to the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues.
- The establishment of the Committee was one of the recommendations included in the agencies’ joint harmonization report issued last year.
- The Staff Report sets forth the preliminary findings of the ongoing review of the events of May 6. It briefs the Advisory Committee regarding the events and provides context regarding the current structure of the equity and futures markets, and the regulatory framework for those markets. The Staff Report is intended to assist the Advisory Committee as it works with us to review the events of May 6. I expect that the Committee will advise the Commission with respect to market structure problems that may have led to the volatility experienced on that day and suggest potential approaches.
In addition, earlier this week, the stock exchanges and the Financial Regulatory Industry Authority (FINRA) filed proposals that would aid in preventing the type of severe price swings that some individual stocks in the S&P 500 experienced on May 6. These rules would establish a market-wide five-minute trading pause in the event that the price of a stock in the S&P 500 moves more than 10 percent during the preceding five minutes. The pause would give the markets the opportunity to attract additional liquidity in the stock, establish a reasonable market price, and resume trading in a fair and orderly fashion.
My testimony today first will summarize the events on May 6, using the best information that is available at this point. Next, it will give a brief summary of initial steps taken to identify the causes and contributing factors of the unusual market activity on May 6, as well as initial steps to help protect against such activity from occurring in the future. Finally, I will discuss various potential regulatory responses that need to be considered in determining how best to maintain fair and orderly financial markets and to prevent subsequent severe market disruptions.
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