September 13, 2010
The Securities and Exchange Commission is likely to revise its approach to circuit breakers on the nation's equities exchanges, to include a "careful review" of price bands that limit how far up or down the price of a stock can move at any given time.
SEC Chairman Mary Schapiro told the Economic Club of New York that market players "should reexamine the circuit breaker mechanisms that directly limit'' the kind of volatility in prices that were seen on May 6, the day when the Flash Crash sent the level of the Dow Jones Industrial Average down hundreds of points and back up again, in a matter of minutes.
The re-examination should include "a careful review of a limit-up, limit-down procedure that would directly prevent trades outside specified parameters, while allowing trading to continue within those parameters," Schapiro said. "Such a procedure could prevent many anomalous trades from ever occurring, as well as limiting the disruptive effect of those that do occur."
Flash Crash Fueling Sizable Fund Withdrawals: Schapiro
Besides ensuring orderly pricing in equity markets, outflows from stock mutual funds that have occurred every single week in the four months since the May 6 Flash Crash, for estimated redemptions totaling more than $50 billion, are causing grave concerns at the SEC.
That was one of the startling messages from SEC Chairman Mary Schapiro recently.
"Retail broker-dealers have told us that individual investors have pulled back from participating in the equity markets since May 6," Schapiro said. "The trend is troubling." Data on equity fund flows from the ICI shows outflows of $24.70 billion in May, $5.64 billion in June, $10.43 billion in July and an estimated $11.62 billion in August-for total outflows of more than $50 billion in the past four months. As of July, total assets in equity mutual funds stood at $4.92 trillion. By comparison, in the 11 weeks leading up to the crash, equity funds took in nearly $27 billion.
Moody's Creates Ratings Just for Money Funds
Moody's has created a new five-point rating scale for money market funds to take into account factors that proved to be critical in the credit crisis, including: a fund portfolio's underlying asset quality, ability to preserve principal while providing liquidity, susceptibility to market risk and the likelihood of support from its sponsor in the event of a "run" on the fund. The credit crisis subjected money funds to "significant stresses not previously experienced," Moody's said, pointing to the collapse of the Reserve Primary Fund.