Though it plummeted 1,000 points on August 24, the Dow Jones Industrial Average was not a market out of control, said a top regulator to the Senate banking committee Thursday.
Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority, said that the market turmoil, including the gyration of exchange-traded product prices, in fact showed the virtue of having appropriate controls in place.
“Were it not for the limit up/limit down procedures, the market fluctuations last August would have been more dramatic,” Ketchum said.
But while defending existing safeguards, the Finra head said the big gaps that day between ETFs and the value of their underlying indexes show regulators may need to review such things as the use of stop orders, which become market orders when triggered and can execute at a price substantially worse than anticipated by the investor, particularly in volatile markets. Regulators must also ponder whether market-maker quoting obligations are stringent enough to promote market stability.
A representative from the Securities and Exchange Commission said during the session that the agency must assess the effectiveness of its high-frequency trading oversight.
“There is a real question whether [some high-frequency traders] are taking speed advantages and using them for improper purposes,” said Stephen Luparello, director of the SEC’s Division of Trading and Markets.
At the same time, he warned that turning back the technology clock is neither feasible nor appropriate for markets where trades are consummated in milliseconds.
Speaking to the growing complexity of the financial markets, Luparello said monitoring the execution quality of trades can be difficult even for sophisticated investors.
He said his staff is preparing recommendations to the commission to expand investors’ understanding of how their brokers decide which of the many trading systems to route their orders to.
He added that there has been real progress in bringing pre-trade price transparency to retail investors in the muni bond market where it has not existed before.