Analysis: Is U.S. stock trading safer? Fewer erroneous trades seen

Tue Jun 11, 2013 2:58pm EDT
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By Herbert Lash

NEW YORK (Reuters) - The water may be safer than many investors thought.

More than three years after the "flash crash" terrified many by temporarily wiping out almost $1 trillion of U.S. stock market value in a few minutes, there are signs that the number of erroneous and aberrant trades is dropping.

The use of circuit breakers for individual securities in the wake of the May 6, 2010 plunge, and the introduction of tougher risk-management controls for broker-dealers in November 2010 appear to have helped stabilize trading, market experts and regulators said.

The Financial Industry Regulatory Authority, the security industry's watchdog, said the number of reports of "clearly erroneous" trades it received was down 84 percent in the last six months of 2012 compared with the first six months of 2009.

"We have seen a dramatic reduction," Richard Ketchum, chairman and chief executive of FINRA, told the Reuters Global Wealth Management Summit last week, though he acknowledged there were still plenty of such incidents.

The signs of greater stability may help bring some smaller investors back into the market. Many had left after losing their shirts in the stock market slide during the financial crisis, and many have missed out on the recovery in the years since. Perceptions that it is a scary place where an investment can seemingly be wiped out in minutes for no fundamental reason were reinforced by the flash crash as well as other episodes of turmoil.

There are, though, still concerns that electronic trading is causing or amplifying price distortions when they occur.

Exchange circuit breakers, which are being upgraded, resulted in a temporary pause in trading for five minutes if shares of a large-cap stock moved 10 percent or more within a five-minute period, not including the opening minutes of trading. The idea is that a cooling off period will allow investors to discount disorderly or erroneous trading and a more normal trading pattern can resume.   Continued...

The Wall Street sign is seen outside the New York Stock Exchange, March 26, 2009. REUTERS/Chip East