U.S. and European regulators are taking steps to rein in the wild gyrations that have plagued financial markets.
German financial regulators announced a 14-month ban Tuesday on naked short sales of some euro zone debt and credit default swaps – speculative trades that some critics blame for worsening the European debt crisis.
Typically, traders must borrow securities to short them, or bet their value will fall. In a naked short sale, traders exploit market anomalies to short stocks they don’t actually own.
The German move, which analysts said could be matched by other European countries, helped fuel another drop in the euro and a selloff on North American and European stock markets.
The unusual intervention seems designed to assuage political concerns that unregulated speculative attacks have dramatically escalated the debt crisis and undermined the euro. But the ban may not have much actual impact on the speculators, the rising volatility in the markets or the faltering single currency.
The bulk of the European short-selling activity that has drawn the ire of policy makers occurs in London, which is beyond the reach of euro zone regulators. And so far its main effect has been to prompt further jitters among bond investors about the risks of holding euro zone debt.
The German action comes as U.S. regulators move to impose emergency curbs to prevent a repeat of the mysterious May 6 “flash crash” that wiped out more than $1-trillion (U.S.) in stock market value in minutes.
Under a proposed rule change filed Tuesday by the U.S. Securities and Exchange Commission, stock exchanges would briefly suspend trading in shares that have unusually wild movements. The plan is slated to go into effect in mid-June as part of a six-month test to gauge its impact on investors.
“We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges,” SEC chairman Mary Schapiro said in a statement. “As such, I believe it is important that all the exchanges quickly reached consensus on a set of uniform circuit breakers that would be triggered when needed.”
Regulators and stock market officials are eager to shore up confidence in U.S markets after the May 6 incident, which briefly sent the Dow Jones industrial average cascading nearly 1,000 points.
Trading of any Standard & Poor's 500 stock that rises or falls 10 per cent or more would be halted for five minutes. These rules, known as “circuit breakers,” would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m., or nearly the length of the trading day.
Ms. Schapiro said her agency is “looking at a number of issues we think can be remediated quickly even before we understand necessarily what the exact cause of the crash was.”
The new breakers will act as “speed bumps to help the market adjust quickly to the high levels of volatility,” Ms. Schapiro told attendees at a conference in Boston by video link from Washington.
Regulators are also looking at trading curbs to halt sudden movements across multiple stock markets. This would give investors time to digest market-moving news and adjust their trading strategies. There are already broad index-based breakers in place, but those were not tripped when the market shot down and then recouped some of its losses in less than 20 minutes that afternoon.
Regulators are still trying to piece together exactly what happened May 6. The worst of the mayhem lasted barely 10 minutes, but sent the Dow plunging nearly 10 per cent. Trading reached 19 billion shares.
“There is still a great deal of work to do and a great deal of information to be reviewed,” Commodity Futures Trading Commission chairman Gary Gensler told reporters Tuesday. A joint SEC and CFTC advisory committee is to review the findings at its first meeting Thursday in Washington.
Canadian market regulators said Tuesday they had not seen any details of the U.S. proposal and could not comment on a possible Canadian response.
Last week, Canadian regulators announced an investigation into unusual trading during the May 6 market plunge, and said they plan to address inconsistent rules for freezing trading on stock exchanges during periods of wild volatility.
But it's unclear whether the review would have to be accelerated in light of U.S. reforms to ensure the two integrated markets have similar circuit breakers in place in the event of another market plunge.
Some stock market officials have traced some of the unusual trading to Waddell & Reed, a Kansas-based mutual fund. In a statement earlier this week, the company said it was among the firms that traded the stock index futures contract suspected of being a crucial link in the cascade of events leading up to the plunge.
Waddell & Reed confirmed that it executed several trading strategies, including index futures contracts, as part of the normal operation of its funds. “Like many market participants, Waddell & Reed was affected negatively by the market activity of May 6,” the company said.
With files from reporter Brian Milner in Toronto, AP and Reuters
