US regulators plan to examine whether securities professionals triggered Thursday’s stock-market plunge or exploited the turmoil to profit illegally, two people with direct knowledge of the matter said.
The US Securities and Exchange Commission (SEC) aims to determine if market participants accidentally or maliciously entered orders that derailed normal trading, the people said, declining to be identified because the inquiry isn’t public. The agency will also examine if controls to prevent the rout from snowballing were not in place at exchanges and firms.
SEC officials, who have not drawn conclusions, began preparing for inquiries in the hours after a US selloff triggered by Europe’s debt crisis briefly erased more than US$1 trillion in market value, beginning around 2:40pm in New York. US stocks tumbled the most in a year as waves of computerized trading exacerbated the rout, sparking a slide in Asian shares.
The SEC and Commodity Futures Trading Commission said in a joint statement after US markets closed that they would examine “unusual trading” that contributed to the plunge.
“We will make public the findings of our review along with recommendations for appropriate action,” they said.
Democratic Representative Paul Kanjorski has set a Tuesday hearing to examine what caused stocks to plunge. He also sent a letter to SEC Chairman Mary Schapiro seeking the agency’s views on the incident and asked what authority the SEC has to prevent futures crashes.
NYSE Euronext spokesman Ray Pellecchia said sudden price moves in multiple stocks reached so-called liquidity replenishment points, prompting the exchange to slow trading in those shares as it tried to ensure an orderly market. Such incidences allow other exchanges to ignore NYSE price quotes.
NYSE Euronext chief operating officer Larry Leibowitz said trades sent to electronic networks fueled the drop. While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the decline snowballed as orders went to venues lacking liquidity to match them, he said in an interview with Bloomberg Television.
“If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split instant because there really was no liquidity in electronic markets.”
New York Stock Exchange spokesman Rich Adamonis said “there were a number of erroneous trades” during the slide. The Dow Jones index ended the session down 347.8 points, or 3.2 percent, to 10,520.32.
Accenture PLC, Exelon Corp and Philip Morris International Inc were among 27 US stocks with at least US$50 million in market value that dropped more than 90 percent as US equities tumbled, before recovering by the close, according to Bloomberg data excluding exchange-traded funds.
NASDAQ OMX Group Inc said 286 securities that rose or fell more than 60 percent during the stock-market’s plunge would have trades canceled. The exchange had no problems with its computer systems, spokesman Robert Madden said in a statement.
NASDAQ which investigated trades between 2:40pm and 3pm, said it did not find any technology or system issues that caused declines of as much as 99.9 percent in some shares.
Citigroup Inc may have been the firm that made an erroneous trade, CNBC said, citing “multiple sources.”
New York-based Citigroup said it found “no evidence” of erroneous trades, and CME Group Inc said the bank’s activity in CME stock index futures didn’t appear to be “irregular or unusual.”
“Somebody hits the wrong button and everybody heads through the same door at the same time,” said David Goerz, who oversees US$17 billion as chief investment officer at Highmark Capital Management in San Francisco. “It clearly was a factor. When you have a lot of skepticism and nervousness in the market place, that just exacerbates the problem.”
Accenture and Exelon were on NASDAQ’s list of companies and dropped more than 60 percent as US equities tumbled, before recovering by the close. The list also included some bearish exchange-traded funds that surged as stocks fell.
The decision means that trades in Cincinnati-based Procter & Gamble Co, which slid as much as 37 percent for the biggest intraday drop in the Dow industrials, would stand. The world’s largest consumer products company said stock trades that pushed its shares down were probably an error.
Philip Morris, which sank as much as 96 percent to US$2, also was not included on the list of companies whose trades would be canceled.
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