Insight: SEC tightens leash on exchanges post "flash crash"

Thu Jan 12, 2012 2:53pm EST
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By Jonathan Spicer, Herbert Lash and Sarah N. Lynch

NEW YORK/WASHINGTON (Reuters) - The May 2010 "flash crash" was bad for almost everyone involved in the stock market, but for the Securities and Exchange Commission, it was a disaster.

With $1 trillion in shareholder equity wiped out in a matter of minutes - however temporarily - alarmed investors demanded answers.

Embarrassingly, the heads of the New York Stock Exchange and Nasdaq Stock Market got into a spat on television, blaming each other for the mess, and the SEC realized that it didn't have the information to explain what caused the scariest few minutes in recent Wall Street history.

The regulators had to seek the data from the exchanges, delaying a much-anticipated report on the crash by nearly five months. The unwelcome lapse in oversight laid bare the SEC's limited ability to track the inner workings of the marketplace when it matters most.

"The idea that the regulator of the largest capital markets in the world cannot easily reconstruct trading when there has been a problem, or when there is a suspicion of manipulation or misconduct, is not acceptable to me," said SEC Chairman Mary Schapiro in an interview.

"We have to have this capacity."

In response to the crash, Schapiro has ordered an SEC crackdown on the exchanges - the front-line for fighting structural flaws and abusive trading in equity markets - in order to oversee more actively a marketplace whose complexity masks serious risks for investors.

The crackdown has come in the form of enforcement actions and gag orders against exchanges. Regulators are moving ahead with a plan to put together a record of all market activity to better oversee trading, a massive undertaking given the volume and rapid-fire pace.   Continued...