In the more than 20 years that followed 1987’s Black Monday, the so-called circuit breakers installed in its wake were activated only once. The public was assured during that time that regulators were on top of increasingly automated and volatile markets, and that regulation was unwise anyway — because openness, in the sense of keeping operations going, no matter what, was essential to market integrity. This longstanding hands-off policy with regard to market volatility may be coming to an end soon.
Referring to last year’s May 6 market meltdown, when the Dow Jones Industrial Average fell 1,000 points, its largest intraday point drop in history, SEC Chairman Mary Schapiro told participants at SIFMA’s Compliance and Legal Society Annual Seminar this month that the agency would soon unveil proposals to make “circuit breakers more meaningful and effective in today’s fast electronic markets.”
Citing some of last May’s fears, she said that today’s market risks include “algorithm-generated volume surges and malevolent hackers,” and called upon her agency to make mandatory a set of Automation Review Policies issued after Black Monday.
The resulting change in trading would be pronounced. A joint SEC/CFTC advisory committee has recommended that the SEC consider using the S&P 500 Index as a mechanism for triggering a trading halt, reducing the initial stoppage to a “period as short as 10 minutes and allowing a halt to be triggered as late as 3:30 p.m.,” Schapiro told the seminar via a video presentation.
Also, the SEC is to publish for comment soon a proposal to adopt a “limit up/limit down” regime for individual stocks experiencing rapid price movement. “Such a regulation would require market participants to meet adequate standards for capacity, resiliency and security of their automated systems” and would apply to exchanges, alternative trading systems handling appreciable volume, clearing agencies, depositories and securities information processors, she said.
The SEC’s compliance division will be looking at the governance structure of companies, with an eye toward ensuring that “registrants have embraced a ‘culture of compliance,’ including enterprise risk management.” Also to be considered by SEC examiners, she said, are “the consolidation of disparate IT” and the familiarity of new business units with risk management, internal audit and compliance functions.
The SEC chair, using this approach, wants to make sure that small problems don’t creep into big ones. “Inattention to risk management can lead to seemingly minor corner-cutting on compliance issues,” she said, “which eventually snowballs into a serious problem for management and investors.”