odyssey. as today, however, is 2010 and we figure out how to effectively balance artificially intelligent with human judgment. intell this hearing will help achieve that goal.judgme it can alsont help determine hon to harness technology to create chnologye audit trails for the regulators. effec somewhere along the way competition among exchange, alternative trading systems andg others has additional lead to increased fragmentation. as the training methods have given way to the modern techniques the rules governing the market architecture hasniqu, lagged behind. we now must integrate the better market's. regulators and exchanges are ready -- already working

together to adapt new rules for creating uniform single stock circuit breakers and updating arc archaic warketwide trading halts. most importantly, we must protect investors' interests. they deserve fair and orderly markets with the securities and exchange commission exists to ensure. despite this mandate, the markets were hardly fair or orderly during last thursday's roller coaster ride. in this turmoil, some investors lost mightily. one recent news story highlights a couple who lost $100,000 because their trade cleared at the wrong moment during thursday's chaos. this turbulence additionally triggered costly stop loss orders for many investors and may have placed others in unintended short positions as trades unwound. the market mayhem also

unfortunately revealed the arbitrariness of the process for identifying and canceling clearly erroneous trades. moreover, the decision to rescind some trades may ultimate -- may have ultimately benefited those who aided and abetted the plunge. this is wrong. they placed a bet and deserve to lose. although stock values quickly sprung back this time, the experience may prove quite different next time. a ghost in the machine scenario in which an enormous computer sell-off sparks a vicious cycle of selling and panic, seems completely plausible. to thwart this doomsday hypothetical, regulators must act with great speed and great care to promulgate new rules. the s.e.c. has already begun this process with its january concept release on market structure. in sum, our witnesses can shed light on the 20 harrowing minutes of last week's flash crash.

they can also explain how we should respond to technological advances, increase competition and other market evolutions in ways that best protect investors. i thank each of the witnesses for appearing, especially on such short notice, and am eager to hear their testimony. i would like to recognize the ranking member, the gentleman from new jersey, mr. garrett, for five minutes. >> i thank the chairman. i thank the witnesses. and, yes, today's hearing is certainly timely. given the events of the last week. but -- in retrospect, dlerg work the regulators have already been doing on the last few days, might have been wise to wait just a few more days to hold this hearing to give our witnesses that additional time to gather information more fully and to analyze the events of the last few days. so ultimately we could come here and be fully informed as to this subcommittee's inquiries.

broadly speaking as well, in a more ideal situation, i guess we could say this subcommittee should be conducting oversights of the s.e.c. and our financial markets. i guess you would say in a more proactive way rather than a reactive way. until your recent testimony here with regard to lehman bankruptcy, chairman schapiro had testified just twice since she was sworn in, far less than her peers. never before today has she been asked to testify on market structure reform, despite the s.e.c.'s ambitious agenda in this area. and so it is precisely for this reason that ranking member baucus and myself sent a letter to chairman frank requesting this committee hold one or more s.e.c. oversight hearings and to do it soon. say, four weeks ago we asked that. we stated in the letter, "it is our constitutional duty to perform regular oversights to allow members in the general public to determine the suitability and the impact of

the s.e.c. proposals as well as judge the quality of the commission's work in furtherance ofas mandated mission to protect investors, maintain a fair, orderly and efficient market and facilitate capital formation. clearly, some will say the degree to which the s.e.c. is currently fulfilling all aspects -- all the aspects of that mission might be said to be called into question during at least the events of this last week, which is why it's important that this subcommittee does examine what went on. that being said, the events of last week will only serve to heighten the already politicized atmosphere surrounding the s.e.c.'s examination overall of market structure. in other letter in a comment letter on the commission's equity market structure concept release that i sent to the chairman on april 22nd, i wrote, while i appreciate the commission's recent efforts to undertake a comprehensive review of our nation's equity market structure, i want to ensure that this analysis starts from the vantage point of preserving or enhancing that which makes our equity trading market strong.

and that change is not pursued purely or largely in response to any external pressures on the entities. i went on to write as independent, nonpartisan agency, the s.e.c. has been entrusted with the responsibility to make its decisions based on objeblthive, prudent and disciplined analysis. it's a great responsibility requires adherence to a balanced and data driven imperical approach to ensure regulatory efforts focus on those most productive areas. finally, i expressed person that in the concept release, the commission's request for comments respecting the interest of long-term and short-term investors seems to focus on a perceived conflict between such groups. with really no reference to the critical interdependency between those groups and the overall equity infrastructure. i'm hopeful the tone of such requests are not reflected in the analytical framework and would rather urge the commission to determine that the additional rulemaking be requid a the outce

the one that benefits this cinergy relationship as a whole. so at today's hearing, i'll be interested as everyone else, to hear from both the s.e.c. and the cftc as well as representatives from the three other exchanges to better understand their perspective on the events of last week. clearly concerns over the financial stability of greece and other european countries were weighing heavily on investors last week. but it appears something else may have factored into the sudden drop in the markets as well. i'm hopeful that today's hearings will begin to provide clarity in what exactly happened. and most of all that they'd begin to have a measures and thoughtful discussion on what, if anything, should be done in a regulatory manner to address what happened then. we should not, however, rush to judgment for the sake of any political cover in any of this. prudent steps can be taken to improve the performance of our markets. we should always take those and be willing to new ideas while keeping in mind throughout our discussion while potential negative consequences might

occur due to any proposed reforms. again, i look forward to all the witnesses' testimony. thank you. >> the chair recognizes the chairman of the full committee, chairman frank, for two minutes. >> mr. chairman, i want to begin by congratulating you for having this hearing. i think the suggestion that we should have waited is clearly wrong. the american people are rightly disturbed. the world is questioning. this is a very important issue. this need not be the last word, but to have failed to have a public hearing of these issues right away would have been not to have done our duty. you are to be congratulated for moving so quickly to begin this process. i also would say i was somewhat struck when the ranking member made two points that seem to be somewhat at odds with each other. one that we haven't had enough hearings in which members of this committee can criticize the s.e.c. for overregulating, which

is essentially what he was talking about, but secondly, that we should respect their independence. he has a right, obviously, to be concerned that the s.e.c. is being more activist in its regulatory agenda than the previous administration had it. i welcome that. i think that what they are doing is very appropriate. and, in fact, i think hearings of the -- with the frequency which we have had have been a useful way to do that. i also want to note that one of the issues we need to address, and i will be talking about this later, is there are some innocent victims here. there are individuals who had invested in american stocks as they had been urged to do who suffered losses through no fault of their own, and i think we should continue to look at what could be done in -- by way of compensation. finally, it is clear we had the interaction here from technical issues, plus the crisis in europe and i welcome and here agarthere was a difference here

among some of us. they'd written to vice president biden telling him to stay out of any efforts by the imf or -- by the imf to try to deal with the crisis in europe. i am glad that advice was disregarded. i think the action in which the american officials participated was very helpful in averting further damage. we will, obviously, be looking into that further. >> thank you, mr. franks. the gentleman from alabama, mr. baucus, is recognized for four minutes. >> thank you, mr. chairman. the american financial markets are the most modern in the world. they execute traysed more efficiently and economically than ever before. they are the envy of the world. the fastest and most liquid in the world. however, some of the innovations, high frequency computer-driven trading across multiple platforms and forums

does create the possibility of the events that we witnessed last week. all innovations bring problems, but also progress. our challenge is to find a solution that addresses the problems but does not destroy the benefits. and in my opinion, since really january, the s.e.c. has done this. they've acted in a measured way. and i think the meeting yesterday was most appropriate. as full ranking member, i did say that we probably should wait until at least the trades were completed to meet and let you have an opportunity to respond. and i think you've done so appropriately. but we're here. whether we're here today or two days from now is, i think, probably irrelevant. rational concern, rising risk and technically overbought market that had raced ahead 70%

in the past year resulted in a skiddish market. increased volatility and an environment subject or vulnerable to panic. any number of events could have contributed to the market plunge last thursday. we've all read the laundry list of what could have happened, what may have happened or it could have been a combination. what's safe to assume is without some preventive measures, they can happen again because any number of things, as were mentioned, could precipitate such an event. in fact, prior to last thursday, on april 27th, you had a smaller event occur. not of the velocity or steepness or quickness, but you have had similar events happen and other individual stock. but none as widespread as last

thursday. and, however, i think because of the dramatic and suddenness of last week's event, there's something constructive in that, and although it undermined investor confidence, i think it clearly pointed out the need to -- for action. in january this year, the s.e.c., to its credit, the commissioner and the commission voted unanimously to move forward with the broad review of equity market structure. and issued a concept released seeking public comment on such issues as high frequency trading, co-locating trading terminals, dark liquidity, market quality metrics and the fairness of the market structure. last thursday's events, i believe, give the s.e.c. the political clout it needs to take action to institute measures to help insulate the markets from what's been described as an electronic meltdown.

and i think it's brought a consensus among the exchanges. it won't be a total cure, nor will there ever be, but it is good first move or good preventive measure. as we move forward, my only advice is to be cautious. solutions are likely to take careful thought and time, and i commend the exchanges in the s.e.c. for the good start on monday. it is more important to get it right than it is to get it done quickly and with less precision. i'll close by saying that when you see the type of temporary anarchy that we witnessed last thursday, it's appropriate to take some preventive measures. with our children or grandchildren, we take a time-out. and i think that we're establishing a procedure similar to that with our markets. so when they do lapse into what we witnessed last thursday. it restores our children's sanity and i think these

preventive measures you propose will restore investor confidence and a certain amount of stability to the markets. so i commend you for what i have witnessed in the last 72 hours. you've done a commendable job. >> the gentleman from new york, mr. ackerman is recognized for two minutes. >> thank you, mr. chairman. i've been advocating for the reinstatement of the up tick rule for the better part of three years. and for the better part of three years, critics of the up tick rule have argued that reinstating the price test that had been in place for over 70 years would have had little or no practical impact on protecting our exchanges and america's investors from nonsensical, irrational and arbitrary runs. then the dow lost 1,000 points in a matter of minutes last thursday, despite the new york stock exchange's circuit breaker protections and apparently as a

result of a well-intentioned s.e.c. regulation meant to encourage more faster trading that mandates electronic trades bypass exchanges that cannot guarantee investors the best price for a particular stock. in other words, the s.e.c.'s regulation in ms overrode the new york stock exchange's protection mechanisms and exacerbated a nonsensical, irrational and arbitrary run last thursday. a run that briefly wiped out a trillion dollars. a run that the uptick rule would have prevented. i hate to say i told you so, so i won't. instead, i'll say what i've been saying for years. i'll say that the up tick rule would have prevented the dow's 1,000-point plunge last thursday. i'll say that investor confidence is of paramount important to the market and the ability of the economy to

recovery. and in the wask last thursday's events if our regulators don't reinstitute some type of meaningful, permanent across-the-board price tests similar to the up tick rule very soon, investors will have very little confidence in our markets and in our regulators. and i can't say that i blame them. i yield back the balance of my time. >> thank you very much, mr. ackerman. we now have the gentleman from california, mr. royce, for three minutes. >> thank you, mr. chairman. i appreciate the time here. i am not sure the up tick rule would have done anything to stave this off at all. in terms of the studies i've seen, and i understand the s.e.c. is still going to take the balance of the week to give us the triggering event, and i know that they have -- they are sorting through 40 different market participants, market centers here in order to try to glean that information. but in the meantime, let me make some observations. and one is that i think if you ask the average american investor what's important, he'd say, you know, an orderly,

well-functioning trading environment. i think she or he would say that there's a little bit of apprehension in terms of what has happened in the past in the market. i'm going to go back to october of 2002 when bear stearns sent an order to sell $4 billion in stocks in the standard & poor's 500 stock index. they meant to send an order for 4 million, not $4 billion, and fortunately at the time, the new york stock exchange specialist saw that. and they sent that information back to the bear stearns floor brokers. after all, this was a time when we had specialists handling and slowing down a lot of these problems. but they didn't get it handled before $622 million in stock had been sold instead of $4 million. so that gives us a window back into what's happened in the past, where i think investors first began to get spooked about

what could happen in the market. and back then, of course, we only had two dominant centers. the new york stock exchange. we had nasdaq. now the s.e.c.'s looking at 40 different market centers. so, you know, i think as we go forward, we can look at some of the upsides that we've seen, the bid/ask spreads have been reduced by the fact that everything sped up in the market. in some ways the market is more efficient. we know germany and other countries have looked at ways to look at individual stocks. and put realtime circuit breaker in effect where, if those stocks drop more than 5%, you are going to have a hold. in five minutes, you're going to have a hold. after that on transactions, as regulators and as market participants, you know, focus on what's afoot in case -- in case we've got something like the bear stearns errant order back in 2002.

as we move forward, i think we recognize that our markets now react in milliseconds to events, but they are monitored by humans who respond in minutes. and in those minutes, you can have the loss of billions of dollars of damage. let me also say that i don't think the members here are criticizing the s.e.c. for overregulating. i think we want the s.e.c. to regulate. i think my concern has been that the market knowledge and experience is greatly lacking at the agency. as myself and my colleague has said in the past, it's overalreaove overlawyered at the s.e.c. we had the observing as during the bernie madoff and the alan stanford cases where we heard from mr. markopolous about those problems. we are hoping that can be changed as the s.e.c. looks into this particular problem as well

and re-engineering the oversight and perhaps putting in to effect better circuit breakers to handle this problem. thank you, mr. chairman. >> thank you, mr. royce. now we'll hear from the gentleman from california, mr. sherman, for two minutes. >> thank you, mr. chairman. i think the issue before us is what is the social utility of high frequency trading? should it be limited? should it be taxed? or do we benefit from enormous quantities of money moving in and out of a stock for a few minutes. we are told that the meltdown will cause no lasting harm. i think this is shortsided. investors for many years will be demanding a risk premium for what they perceive as a market that can go crazy, at least for an hour or half an hour. and we'll be told that with a few patches, the system will work fine in the future and this could never happen again. sure. in our society, we have

allocated some of the smartest business and computer minds to wall street. we're told that they should earn the highest rates of return on their intellectual capital of any profession because they allocate capital to our real businesses. but what does that have to do with high frequency trading? does high frequency trading a necessary part of allocating capital to real businesses. or is it a parasittic attachment in which some smart people with some fast computers can take a little piece of the profit that each real investor should get and divert it to themselves. our accenture and proctor & gamble and 3m better off today as operating businesses because their stocks are subject to high frequency trading? i would think that what's likely

to happen is we'll patch up the present system and tell the american people not to worry. but i hope instead that we will take a look at high frequency trading and see whether it should be limited or subject to just a small tax to recognize that there is a social cost to this activity and it's something that we might want to discourage so that real investors reap the profits on wall street. i yield back. >> thank you very much, mr. chairman. the gentleman from texas, mr. hensarling. >> i certainly agree this is an important hearing. any time a trillion dollars of market value disappears in a matter of minutes, and a lot of small investors are hurt, we need to have a congressional hearing. two to the extent that we are going to receive answers today from our panel, then i applaud the timing of the hearing. to the extent we are hindering the panelists from finding those answers, then i question the

timing of the hearing. frequently, when we have extreme market volatility, the cry goes out somewhere quick, let's shoot the computers. i've never really agreed with that particular position, although i do have an open mind that perhaps some reprogramming may be in order. specifically ido believe that we at least need to look and examine the desirablity of having stock-specific circuit breakers across all of our markets. and certainly there's an open question on the impact of canceling trades. i mean, how many folks ended up with unintended short positions while arguably adding needed liquidity in a sinking market? but at the end of the day, i think we should tread very, very carefully in this space. improved technology, rule mms, have brought great benefits to trading. more competitive markets, cheaper trades and really a democratization of investment

opportunities. but more importantly, i believe that we need to look beyond simply the mechanics of the panic and look to its likely underlying cause, that being the international debt crisis that is first manifesting itself in greece. a number of media outlets have spoken to this. we had a cbs/ap report, greek debt, trader era eyed in market sell-off. may 6th, traders were not comforted by the fact that greece seemed to be working toward a resolution of its debt problems. instead, they focus on the possibility that other european countries would also run into trouble. wall street journal, many traders worried about the economic situation in europe. the dow had already been moving lower. as television screens displayed scenes of rioting on greek streets. fox business quoted a managing director of night capital partners. "the tone and tenor of the global debt crisis has taken over the market.

everything else has taken a back seat." so there is an open question among many in our investing public whether or not we are on the road to being greece ourselves. given that the deficit has increased tenfold in just two years. the president has put forth a budget that will triple the national debt in ten. there's fear that greece is the coming of preview attractions to the u.s. no matter how many well-designed exits you have, no matter how many well-trained ushers you have, no matter how well designed your exit plan, if people in the theater sense that something is smoldering, you cannot ultimately remove the conditions of panic. thank you, mr. chairman. i yield back. >> thank you, mr. hensarling. now the gentleman from georgia for mr. scott from one minute. >> thank you, mr. chairman. i think what we have here is a clear example of how we as a society have become more the

servants of the machine that was created to serve us. our technology has now far surpassed our human ability to keep up with it. i think we have to move with caution. make sure we get the right causes of this problem. make sure that we understand that our foremost obligation at this point is to make sure we have investor confidence that the american people have confidence in our system. and so it is important that we listen to you. the securities and exchange commission, you have to make it work. the commodities trading commission, you have to -- the chicago mercantile exchange and the new york stock exchange. but we have a very complex system. we have nearly 50 markets. we have over hundreds of millions of computers that are making these sales.

and megaseconds far outpacing our human capacity to deal with it. if we do get the circuit breaker concept, we need to make sure how that is going to work. will that do the job? what is important here is we move carefully, thoughtfully and let's get the right correction to this problem. the american investors and the were on the wrong side of that sale you lost a lot of moneyou, mr. scott. time has expired. now we'll hear from mr. perlmatter for two minutes. >> and i would just like to remind the committee and the panelists that in the financial reform bill that we passed to the senate there is -- we were sort of directed to this nanotrading high frequency trading issue by some of our prior hearings, and there is a section of the bill, section 7304, asking the s.e.c. and

other of the regulators to take a look at high frequency trading and its impact upon the markets and good news is it's in the bill. the bad news is that thursday hit us before there was any action on the bill. i know that the regulators have been looking at this under their own authority. and i would encourage them to continue to do this. i am surprised by my friends on the other side of the aisle who question whether this is too early to look at this. we should be looking at this high frequency trading, 5,000 trades per second. how do you manage something like that? that's the real question. in the blink of an eye by a mistake or intentional act, whatever it might be, boom. this country lost a trillion dollars over 20 minutes. my friends on the other side of the aisle complain about, you know, the spending and all this stuff by the obama administration when, because of failures in the market, because

of sales and failure of the up tick rule, not having those kinds of things, we lost $17.2 trillion in the last 18 months of the bush administration. since the obama administration's come in, we've gained about $6.5 trillion back. we lost a trillion last thursday and then have gained most of that back. there has to be a real good understanding of the algorithm drifb, nanotrading that we have. it has benefits. mr. hensarling is right. the liquidity it brings. but certainly if you were on the wrong side of that sale you lost a lot of money, and we can't have that in this system. so i yield back, mr. chairman. >> thank you, mr. perlmutter. now, the last presenter, mr. foster, for two minutes. >> thank you. and i want to thank the chairman for holding this important and timely hearing. as a high energy particle physicist i spent many years

digitizing computers. the systems programmed by very smart individuals exhibit complex and erratic behavior when they're simply thrown together does not surprise me at all. however, the fact these systems are put in control of a large and important section of our economy without sufficiently robust testing of their interoperablity and immunity to coherent instabilities is an outrage. the absence of systemwide circuit breakers to limit the damage when a single element or set of elements malfunctions is indefensib indefensible. as is the absence of uniform legal clarity when it comes time to bust trades made on a clearly erroneous basis. part of the problem that we're facing is the mismatch between the time scales of human thought and machine action. while the logic of circuit breakers and market pausers to restore liquidity has been understood it must be on a time scale of computer trading and implemented uniformally across a wide variety of trading

platforms. the race toward loweralatencies and higher speed trading shows no sign of abating. start-up companies are developing trading on matching engines based not just on clusters of computer servers, which will be too slow to compete but dedicated pipeline based on things that will perform a dedicated calculation 100 times faster than a dedicated computer processor. in particle physics these have been used for years to perform specialized calculations at high speed. i've spent years using them to stabilize numbers large numbers of particles traveling near light speed around the circumference of a particle accelerator. while a market pause of five seconds may be required to restore liquidity, for today's trading algorithms, a market pause of only 50 milliseconds may be appropriate when the next generation of technology comes online. we have to stay ahead of the technological curve and we have to institute agsize appropriate inner operablity and stability tests before new algorithms are

brought online. the reason that successary capital markets exist is to provide a reliable and transparent mean for investors to appropriately profit from their wise investments in the real economy. events like those of last thursday were $1 trillion disappeared and then reappeared in the financial markets destroys that transparency and the -- and destroys confidence and are simply unacceptable. i thank you and i yield back the balance of my time. >> thank you, mr. foster. and now we'll move to the panel. but i want to make an observation that the issue is not one of declining stocks. the issue is volatility. while some stocks like accenture fell from $40 per share to just pennies, others like sutherby's soared. on thursday the auction house reported a $2.2 million quarterly loss. its shares went from $34 to over $100,000 within minutes. something was clearly wrong and

that's the reason that some two hours after that break, madam chairman, i had the pleasure of calling you and you were so kind as to take that call where we could structure this public meeting. i say that because, as you know, i stated to you, i thought that we'd have a much more disturbed population as a result of the happenings on thursday. i'm rather happy it doesn't seem to reflect that in the marketplace. but i'm sure that has something to do with the way you and mr. genslar as regulators have handled this and publicly stated what you are doing. so i commend you. i thank you for taking the time out to take the call on thursday and to be here today in such short notice. now we're going to charge you with the opportunity within the next five minutes of reducing your statement to five minutes as best as possible and tell us in its entirety what caused this problem, what can be done about

this problem and how we can get started. but also, accompanied, madam chairman, is mr. robert w. cook, director of the division of trading and markets of the united states securities and exchange commission. and now we'd like to hear from chairman schapiro. >> i hope i won't disappoint you. chairman kanjorski, ranking member garrett and members of the subcommittee, a appreciate the opportunity to testify. as you mentioned, i am joined by robert cook, the director of the vision of trading and markets at the s.e.c. who has been deeply involved in the analysis of the market, vents. the sudden evaporation of meaningful prices for many major exchange listed stocks in the middle of a trading day is unacceptable and clearly contrary to the vital policy objective of maintaining fair and orderly financial markets. the s.e.c. is working around the clock to identify the causes of this sudden spike and to make changes which will help prevent disruptions of this type in the future. on may 6th, the dow jones

industrial average dropped more than 573 points in just five minutes. as quickly as the market dropped it suddenly and dramatically reversed itself, recovering of 4 543 points in a minute and a half. many individual securities experienced much larger swings in their trading activity. and certain trades were executed at absurdly low prices. pursuant to exchange rules after closing, the equity markets worked out a common standard to cancel trades. the exchanges determined to cancel any trades from 240 to 3:00 at prices 60% away from the last trade at or before 2:40 p.m. today, the s.e.c. has more than 100 people working tirelessly on this issue. we are sorting through literally millions of trades and carefully comparing timing and activity across markets to isolate the cause or causes of the spike. we will take action to change any aspect of our market structure which may have

contributed during the supreme volatility. we made progress in our ongoing review and can provide preliminary findings. first, while we cannot yet definitively rule out the possibility of a fat finger error, our own review and reviews by the relevant exchanges and market participants has not uncovered such an error. second, there have been reports that one or more exceptionally large orders in certain stocks may have preceded and helped to trigger the broader decline. however, there does not yet appear to have been any unusual prior securities trading that would have triggered the broader market decline. third, while some have focused on the role of the e-mini s&p 500 future, in leading the market decline and recovery, it must be recognized that the fact that stock prices follow futures prices chronologically does not necessarily suggest what may have triggered the price movements. given that the e-mini futures price fell by more than 5% in a few minutes and quickly recovered all the 5% decline, it should be no surprise the broader stock market indices

showed similarly fast and similarly large declines in recoveries. finally,a this time, we've not identified any information consistent with computer hacker or terrorist activity. ultimately, we may learn that the extraordinary disruption in trading was the result of a confluence of events, which taken together exacerbated what already had been a down day and led to an extraordinarily steep price drop and recovery. however, we continue our efforts to identify the triggers and will share them with the public as they are identified. earlier today, the s.e.c. and the cftc announced the creation of an advisory committee that will, among other things, work with us in reviewing appropriate regulatory changes in response to the events of may 6th. and the staff of our agencies intend to provide that committee with our preliminary findings next week. last thursday, the events could be likened to many dominos falling. and while we are all understandably focused on why the first domino fell, it's equally important to understand why so many others fail as well.

i believe we will pinpoint the triggering events but it's fair to say the disparate events caused many more dominos to fall than should have. for this season, the s.e.c. convened a meeting yesterday with the leaders of six exchanges and finra where we agreed to examine circuit breakers that will not unnecessarily interfere with market activity but that will pause trading while the markets check for technical problems and recover liquidity. we also reached general consensus on the need for stock by stock circuit breakers. i expect that later today, we will further refine when those circuit breakers might be triggered and for how long. further, we are also committed to creating a sound framework for better handling the breaking of erroneous trades. i believe all these actions can help to prevent a repeat of the unusual market volatility. but these are only interim steps. we must quickly consider what additional steps are necessary

to strengthen our market structure and minimize future disruptions. we've already launched initiatives that will address many of the issues illuminated last week. earlier this year we issued a concept release on market structure that solicited public comments on steps to min inize short-term volatility and systemic risk. we also formally proposed creating a large trader reporting system to enhance the commission's surveillance and enforcement capabilities and we've proposed strong broker/dealer risk management controls when a broker allows a customer direct access to our markets. in order to help regulators keep pace with technology and trading patterns, we have also been working on a proposal to create a consolidated order tracking system or consolidated audit trail. within the next few weeks i expect the commission to consider this proposal which would capture all the data needed for cross-market surveillance. this will significantly improve our ability to conduct timely

trading analyses like that which is currently under way. in conclusions the s.e.c. is making progress in its ongoing review. will ultimately find the cause or causes of the disruption. and we'll put in place safeguards that will help prevent the type of unusual tratding activity that occurred last week. i look forward to working with you on these issues in the coming weeks and, of course, we would be pleased to answer any questions. >> thank you very much, madam chairman. next we have the chairman of the commodities future trading commission, chairman genslar. thank you very much for responding, too, as quickly as you did. fortunately, i didn't have to call you because i didn't think it stretched to the futures market. that becoming apparent, it's good that you can be here as a corollary regulator so that we can get to the bottom of this. you are under the same restrictions. hopefully to give us about a five-minute presentation so we

can get to questions. >> i thank you chairman kanjorski, ranking member garrett, members of the subcommittee. and i am pleased to be here alongside s.e.c. chair mary schapiro, with whom we have been working very closely and diligently since last thursday to explore and see what we can find out about the events. before i turn to those events, let me just say something about the stock futures market. stock index futures trade on centralized exchanges and they are based upon the broad market index. the total outstandings about $360 billion. this compares to approximately $13 trillion of the overall equity market. but stock index futures do play an integral role to the pricing of the overall market. the largest contract called the e-mini s&p 500 contract trades on the chicago mercantile exchange. it's about 80% of that market. and we'll focus a little bit of that in our testimony.

there are procedures on that contract, and i want to mention four quick procedures that are risk management procedures to ensure the orderliness of the market. electronic trading systems on all of the markets for these contracts reject orders priced outside of a narrow band. about 1% band up or down. secondly, the exchanges actually have maximum order sizes. congressman royce mentioned something from years ago. today only about $100 million transaction could be entered. the average transaction, though in the e-mini is about $330,000 in size. third, exchanges have something that limits stop loss orders, and i can get more into that in the testimony. and fourth, they also have something which is a market pause. a five-second pause if the order book gets out of balance. and, in fact, last thursday, that five-second pause occurred exactly when the market

bottomed. in terms of the preliminary review, we're looking at millions of trades. the cftc fortunately has all of the trading data entered into our systems by the very next morning because, under our act, we're able to get that from the exchanges. i think that would be good if the s.e.c., i know, is working on that. but the -- the staffs of our agency and the s.e.c. and the exchanges have looked at it. and it's a very ongoing process. let me mention four things, though. may 6th started turbulent. you can think of an airplane in turbulent skies. but it was very turbulent that day with the economic news emanating out of europe. volatility pricing was pricing up. it had actually gone up about 60% interday from wednesday to thursday on some measures. further, the futures markets and other markets are so intertwined that stock index futures look to other price signals from all of the other markets.

and there were a lot of markets coming in with signals that were showing risk premiums were widening. currency markets were volatile. small capitalization equity securities began declining sharply between 2:00 and sharply between 2:00 and 2:20 east coast time and 2:24 east coast time, four securities off 50% in the preceding 24 minutes. other price signals started to come after 2:30. some of the large markets started to delink under what's called a self-help program that you'll hear about a little later, nasdaq and some of the others. and so some of these signalings kept coming in. our own review of trading data shows that somewhere starting around 2:40 some of the most actively traded participants in the futures markets started to limit their participation around 2:42, 2:43 and so forth and that's exactly when that "v" was

happening. as people -- some of them were limiting or even withdrawing from the market. another factor in the midst of this one large investor executed a bona fide hedgie ining transa in the size of normal days would move through the markets. 9% of the volume during the period down and up. but that was also -- may have had some participation within this. so between 2:40 and 2:45 the market did go down five additional points. at 2:45:28 this five-second pause happened on the chicago mercantile exchange so the order book could get rebalanced in the computer and, in fact, that was the bottom. the spider, which is the exchange traded fund, is a security, but trades in the market, bottom seven seconds later, the cash mashtsed bottomed all in the next minute,

the 2:46 minute and you saw the market move back up. exchanges in market parse pants have asked the question about fat finger mistake, exchanges, looked at it closely, we've reviewed some of their work, of course, and have not found the fat finger issues similar to what mary said earlier. in that regard. despite the high volatility the clearing houses and settlement and margin posting all worked both thursday and friday, so the plumbing or the backside of this worked. but we continue to review main 6 with the s.e.c., particularly how the s&p futures traded, in relation to the cash market, and to the extent that trading keyed in on some of the other indexes. as mary said earlier we set up a joint advisory committee that we will be issuing a preliminary statement report next week and hopefully convening that

committee to look at recommendations. i look forward to working with this committee and taking your questions. >> thank you very much, mr. chairman. may open for questions, i think i heard you say, madam chairman, that there will be an answer to this reason a reasonably short of time, within a matter of weeks, is that what you anticipate? >> i didn't give a time frame. i did say we will get to the bottom of this. i think we will be able to determine what the initial triggers were. that's going to take time. there are 66 million trades on may 6th covering 19.5 billion shares of stock. think of what happened in 1987 when the market had its largest move in history and the brady commission was created there were a tiny fraction of the number of trades that we experienced today, about 600 million shares of stock compared to 19 billion shares. so that took several months with

a dedicated group of people working on it. we will move as quickly as we can, but i can't give you a date when we'll have the final answers, but we will make them public. next week we plan to give preliminary findings to our advisory group and make those public at the same time. >> that's a very important question. in order to have the stability in the market, i think we shouldn't withhold anything from the public because if we do, we're apt to get all the conspiracy theorists, very active and as you know, you can imagine almost anything. but you can't rule out any particular cause at this point, is that correct? >> i think that's fair to say. we have not found evidence of terrorist activity. we have not found evidence of computer hacking or a fat finger or a particular large trade that drove the markets initially. but we're not ruling anything out at this point and that's one reason we want to make some

preliminary findings available next week. >> tomorrow the same thing could happen. >> i have to say it's not impossible. there's no reason to expect it would happen tomorrow. but that's one reason with quite a sense of urgency we brought all of the markets to washington to start to work on some solutions to the problem, focusing in particular on stock by stock circuit breakers. >> so it's reasonable to assume without knowing the absolute cause of this event, you could put new rules in place and organize the regulators and the markets to prevent a similar occurrence of this in the future before we get to the final cause of this. >> i think it's important to understand the original initial cause and triggering events but i also think it's critical. we know what the damage was that was done. we need to put in place the mechanisms that can prevent that from happening again while we

continue to diagnose the source of the problem. >> is there -- i'll ask this as a joint question between the two of you, do you have any suspicions it was cdone for profit or any conspirator group of any kind or is this a glitch if your opinion some. >> i don't think we have evidence. i will let chairman gensler done, that this was done in any kind of a malicious way. my inclination is, we have a widely dispersed ek quitty market in the united states. we had different rules and conventions applying in the different markets that allowed for activity to be transmitted from one place to another without everybody following the same protocol. >> though we may find there is something our enforcement arm has to take up and we've been active as of thursday afternoon putting out a special cause under our act to information to large participants there are

about 250 participants in this emini contract during the course of the critical 20 to 30 minutes. we have been investigating most closely the ten largest shorts and ten largest longs in that market but we're looking at others as well. i think that it was sort of the tour but lens in the skies added with a lot of signals that were coming in that markets do work on, as they say, fear and agreed and in those critical moments i think in a sense the fear took over. there was a second factor that individual stocks were breaking further down and that's an issue that's -- we're talking about. >> mr. chairman, if i could add we've fully integrated our enforcement group as well into the analysis and they have sent out a number of subpoenas so that we can look at particular activity in very gran null detail and of course if there's anything there we will be fol hadding up on it. >> we have passed in the house the regulatory reform bill now

pending in the senate and being acted upon. there have been some individuals, particularly several united states senators, that have suggested that there may be a remedy to be had that we could include within the regulatory reform provision. you see that as a possibility and i guess the open question i want to ask, do either of you see a need for additional authority as regulators to ultimately get to the solution to this problem? >> i think, mr. chairman, that we believe we have the authority that we need with respect to the issue of circuit breakers and potentially imposing stock by stock circuit breakers, we certainly have the authority we need to create and develop with the markets a consolidated order audit trail which will facilitate our work greatly and the other issues that come out of the events of thursday looking at whether market orders should be limited in circumstances or how do we deal with canceled trades going forward. i think we believe we have the full authority we need there.

coming out of our broader review of market structure, it's possible that we will need to come to congress for some kind of authority but i can't even predict at this point what that might be. >> i would say, mr. chair, i think since markets are so interrelated and the over-the-counter derivative market and the form that this committee has moved would give us a greater window. right now our full review is on the listed securities and, of course, the futures markets, but not that over the counter derivatives that may have played some role in thursday as well. >> thank you very much. now the gentleman from new jersey, mr. gary. >> thank you, mr. chairman, thank you to the panel again. following up along that last line, i guess i was a little confused by some of the comments from the senate which often happens as well. you know, you had senator dodd saying we need to get in place our bill, the bill you just referenced to, and have the president sign it so we have the

tools to protect our economy from these kind of events, sort of implying maybe we need to pass that legislation and give you that authority and then out of the same breath he also said i don't think you, need the legislation in the area, and my guess is you need the regulators to step up and make sure this high frequency trading, flash trading, going on, that's something we ought to take a look at. on the one hand he was saying we needed more statutes and more laws and on the other hand i think he recognized what you said, chairman, that you have the authority in all these areas to address the situation. >> we believe we have the authority to address these events. again, there may be issues that arise as we work through the market structure concept release and all the many issues we've raised with respect to high frequency trading, volatility and other matters that might require us to come to you for legislation, but with respect to these issues and circuit breakers in particular, we have a high level of confidence. >> okay. let's go to the circuit breaker

situation for a second. i was in manhattan meeting with a number of my constituents who work in that area and there are, as you can anticipate, a number of rumors that are out there right now, so maybe you dispelled one and that is that it was hackers and what have you. maybe you can dispel another, is that you are going to use -- will you be using your emergency authority in order to implement these rules? that will be the first question. >> first of all, we don't have final rules. >> right. >> constructed yet. one of the reasons we brought the markets to washington to discuss these in some detail and then to charge them with going off and coming back with recommendations. >> right. >> is that we want the deep expertise and knowledge that they have from running marketplaces every single day. i think we are likely to do this through exchange rule filings, primarily, that would come to the commission for approval. we understand the need for adequate times for programming, computer systems, and for educating other market participants with respect to how the rules would operate.

>> okay. i'll just throw out an easy one as far as the rumors out there, is that if they were going -- you were going to suggest circuit breakers as far as percentages of deviation of around -- as small as 2%, where some of the traders would say it's woefully too low. >> we understand that issue and that's why again the exchanges are really assisting with understanding how to fine tune both the level of change in a stock price over what period of time, whether it's done off a rolling average or the prior day's close and then what period of time for a pause gives the human beings a sufficient amount of time to make the decisions that they need to make about whether al gor rhythms are not operating quickly, whether there's additional liquidity that can be brought into the marketplace. those are all the issues we were discussing. >> so the answer was, maybe? >> there's complexity. >> okay. >> to it. so i can't tell you that it

would be 2% over five minutes in price change. we're not at that point yet. >> okay. you also said you there at the panel on the table have set up a joint advisory committee, i'm not sure what the exact -- >> that's it. >> joint advisory committee. who all is on that joint advisory committee? >> we selected people who have expertise in markets and market micro structure in particular, so we have two former cftc chairs, susan phillips, actually the first woman appointed to chair a regulatory agency at the federal level by president reagan and brookly born, also former ftc chair, david router, former s.e.c. chair who went through the market break in 1987 and its aftermath, jack bren flan, former ceo and chairman of vanguard a large institutional investor. >> do you have a current market -- other current market

parse paunticipan participants. >> we have a current market regulator who spent time with the nasdaq and new york stock exchange. we did not want to have people who have a direct vested interest in advising the commission, although this group's deliberations will be fully and public and all of our meetings will be public, but we tried to pick people, particularly the academics, maureen o'hare from cornell, robert engel from nyu. >> might be good to have some of the participants up to date. >> they will present to this group, they will submit information to the group. >> one last -- >> sorry. >> you get my point on that. >> i could get your point. >> and the last ten seconds here is, the chairman indicated that he phoned you about two hours after this all occurred, i guess. you are now asking the participants, the regulated entities, to respond back in 24 hours from yesterday. i guess one of the other questions i had, yesterday is, if congress could call you

within two hours to begin the process to find out what's going on, did you have the authority to e-mail out immediately to all 40 or 50 entity ts and say we want to have an answer back from you like you did yesterday. >> i spoke with the heads of the major exchanges on thursday, through thursday evening, all day friday and our staffs were in minute by minute contact virtually the entire day saturday and sunday. >> okay. >> i did not want to bring them to washington on friday. i thought they needed to be there when their markets opened to handle any other fallout or issues that might have come from thursday, but monday morning was a good time. i wanted everybody in the room together. i didn't want ad hoc e-mails with loose ideas. i wanted people together so we could think through what the issues were and how we might best solve them as a group. >> we, too, were talking to our exchanges by 1:00 a.m., which i guess would have been thursday night, friday, we had our first full memo from the chicago mercantile exchange analyzing

this contract. we had the entire data set loaded into our computers by 9:30 friday morning. >> i appreciate it. thank you. >> gentleman's time has expired. hear from gentleman from california, mr. sherman. >> thank you, mr. chairman. volatility leads to perceived risk, perceived risk leads to higher cost of capital for real businesses in the real america. if we had markets in which all the profits accrued to real investors, i think that would be appealing to those making real investments in real american companies. in contrast, a market in which procter & gamble could drop to one cent is not appealing to those who want to provide real capital to real companies. most of the testimony here simply assumes that we're going to let people keep doing what they're doing, unlimited and untaxed and we're going to patch up the system in the hope that it won't happen again.

s this is like the reaction if we had the unplanned explosion of nitroglycerin. if that explosion took place in a mining operation or something else socially useful, we would say, let's have better regulations so we can get that social utility of the nitroglycerin without having it explode the an unplanned way. but if this inherently risky nitroglycerin had an unplanned explosion because kids or gamblers were playing with it, we might instead not say, well how can we somewhat reduce the risk of an inherently risky activity we would say why are we allowing this activity to take place? so it raises the question of whether high frequency trading serves a social purpose.

imagine if chairman schapiro, imagine that somehow by magic we created a world in which those investing in u.s. stocks actually held them for a couple of hours before they sold them or went short before a couple hours before they covered. let's say that applied to procter & gamble or 3 m, how would the employees of procter & gamble or 3m, what catastrophe would they face if the stocks of their companies were not subject to high fecsy trading? would that help those employees and those operating companies or would there be some cataclysmic problem if high frequency trading did not apply to those companies? >> let me first of all agree the purpose of our capital markets is to help companies to raise capitals, create jobs, help our economy jobs and investors who commit their capital to those markets get to share economically in that growth and

development. we have lots of question about high frequency trading and its role in our capital markets. it's one reason we've exposed many of the issues related to high frequency trading for public comment. >> madam chairman, i know you have many questions. i have one question and it is my time. what catastrophe would occur to the employees of procter & gamble if the stock of that company was not subject to high frequency trading? >> i don't know that any catastrophe would. there are those who argue perhaps on the next panel that high frequency trading adds liquidity to the marketplace so when those employees want to sell it's easier for them to do that. >> to what extent do you agree with the view that these high frequency traders are parasites on the market, you have a market that is in which real investors are buying and selling and people come into that market and grab a little piece of the profit for themselves who are not engaged in real investing?

>> i guess i really can't answer that question. >> they might be parasites, may not be and i'll ask you to answer that for the record because i'm going to go on to the next question. would a tax of one-twentsth of 1% of $1,000 be sufficient to disrupt the business model of those who are engaged in high frequency trading so that they -- they would substantially diminish the amount of high frequency trading? >> i honestly don't know the answer to that question. i would be happy to think through. >> i'll ask you to think it through and then we'll have the argument that if we don't have the casinos on our main street so they'll play the casinos in monte carlo, but i would say that if all of the american markets trading american stocks were insulated from most of this high frequency trading, that's where real investors would want to go and if over in dubai somebody wants to bet for a

milli second on what happens on the u.s. markets, at least it's not american minds, american computers, or the american markets put at risk. and i believe my time has expired. >> thank you very much, mr. chairman. i'll hear from the gentleman from alabama, the ranking member of the full committee, mr. baucus. >> thank you, mr. chairman. you know, when the steam engine came along it hit a lot of live stock and a lot of farmers thought they should do away with the steam engine. it set fire to some of the fields. but we figured out some preventative measures and we've done okay with it. of course it was replaced by the diesel engine and a lot of people thought that was a setback. i kind of think high frequency is not such a bad thing. as i said in my opening statement, you've identified some of these problems back in january and started asking for public comment which is what we always urge you to do. i think you've got your hands around the problem.

how do you d we've gone from a highly structured nasdaq, not with options, but the nasdaq or new york stock market to 50 different trading platforms, how do you -- how do you ensure the integrity of the market's price discovery, without hurting competition and without degrading those individual models which all have their strengths and weaknesses? i would ask both chairman. >> it's a great question because there are clearly challenges associated with our highly automated and highly dispersed and fragmented marketplace and i think the way we ensure integrity is to have those markets linked so investors' orders get the best execution they can and that's a requirement, but looking forward what we have to do is make sure the markets are operating under basically the same rules so investor is not disadvantaged

trading the same stock in different venues. they should be able to get the best price wherever they are. i think the issues highlighted by thursday, many of them are addressed, not solved, but addressed well, by the creation of the single stock circuit breakers that would allow for the times when the technology gets ahead of the people by too much, to take a time-out and refresh the marketplace. but we've raised so many of these issues in our market structure concept because we really do want to explore them in a thoughtful way, while we do that there are short-term things i think that are important for us to do. the circuit breakers are among those dealing with direct market access by customers into the exchanges, is something i think we need to deal with and some issues around dark pulls of liquidity and the use of flash orders and others, all of which we have right now. >> and i just think that, though it's outside of my lane, that i think it is really important

that these 40 or so venues, and it may be 70 in the future v consistent roles, that they're transparent rules, the public knows the rules, if there's a time-out or pause, whether it's five seconds, milliseconds or a minute, it be consistently applied if you go dark on a stock somewhere, you go dark elsewhere, do it in single stock futures where we coregulate and so forth. >> i think i commend you. i used the word addressed not solve in my opening statement because i think we're trying to address them, but you never quite solve all of the problems. you know, i also am -- believe in both you and your statements, chairman gensler you mentioned there are already a lot of [ inaudible ] increased volatility, people are on the edge of their chairs anyway, so obviously as i said, it created an environment where, do you think we could find -- i'm suspect that there's not one

contributing cause to this. that it was probably a combination. you could have had a large in the s&p 500, and you could point to that as possibly, you know, a part of it, but that's not -- that doesn't mean that wasn't a legitimate hedging device. >> right. i think, congressman, our capital markets, there's not one king or one or something, it's diverse. in a sense the beauty of markets. but i think that this was a very turbulent time. i think there was a lot of price signals by 2:00 to 2:30 that were going negative, if it was an airplane analogy, you had the indicator lights now sending charges back. you also had one of the engines start to not run too well because liquidity was stepping out of the market. we did see by 2:40, 2:42 a number of active market makersrs

even the high frequency traders, limiting the capacities. the major exchanges said their order books seemed thinner, less bidders in that and you had a little extra cargo, bona fide hedging program was only 9% of the emini but may have had some factor in this. >> on the s.e.c.'s address, you know, at least stark liquidity is part of their concept. do you have any comment, chairman schapiro? >> the only thing i might add to the scenario that chairman gensler went through, we also saw because of the skittishness in the markets i think a lot of stop loss orders had been entered by investors hoping to limit their losses. those were run through and as a result, the market continued to drive down. one of the things we want to look at is the use of stop loss orders and market ord is which get you a fast execution but maybe at a terrible price along the lines of the chairman comments at the very beginning.

>> yeah. seems there should have been some obligation by the brokers not to execute an order on a $30 stock at a penny. that's just good -- i would think that's a few dush areary relationship. . >> thank you. >> we'll hear from the gentleman from texas. >> thank you, mr. chairman. thank you for having this hearing. before i make a statement and ask some questions, i ask unanimous consent to enter into the record the joint cftc and s.e.c. advisory committee on emerging regulatory issues dated may 10th, 2010. >> without objection, so ordered. >> thank you. i want to agree with my colleagues on both siders of the aisles that the dow jones

industrial average plummeting 508 points, losing 22% of its total value, cost a great deal of concern for those of us on the house floor that thursday afternoon. the s&p 500 dropped 20% falling from 282 to 225 points and this was the greatest loss wall street had ever received on a single day. i want to ask a question first of chairman schapiro. was market fragmentation a key cause of last week's 990-point drop in the dow jones index? >> congressman, i don't think there's any question but the fact we have a highly practicingmented market is a contributing factor and creates challenges. it doesn't have to be the result we had last thursday, if the

markets while dispersed and many of them play by the same rules and have the same trading conventions so that if all of the markets are subject to halting trading in a stock when it reaches a certain price, then i think we would not have had some of the fallout that we had last week. >> well having a brady commission which has made lots of recommendations, tell me, have any of those recommendations been put into effect? >> oh, yes. the actual market wide circuit breakers that exist today were a direct result of the brady commission's report in january of 1988. one of the things we're looking at jointly because the two agencies is whether those market wide circuit breakers that have the markets shutting for brief periods of time when the dow goes down 10%, 20% and then 30% shutting completely need to be updated and modernized and that's an effort we're undergoing right now. >> so if you could tell me the similarities then of that october 19th, 1987 market crash,

and give me the similarities and is that being investigated so as you said, that it not happen again? >> absolutely. if you look -- i actually went back and looked at the brady commission report over the weekend and it's interesting that their findings are that there were multiple events that caused the market to decline. i believe it was 26% in october of 1987 on that day. and that's similar to what we will ultimately find here, there were multiple contributing events. the difference is, trading largely took place at that time on the nasdaq stock market and the new york stock exchange. there were not multiple trading venues although trading in the futures market delinked from the trading in the ek quickty market. the delinkage issues exist among the equity markets. we see another similarity there. we're trying to do the same careful and thoughtful review of the events that we expect will

lead us to some kinds of recommendations that while not the same as the brady commission, are similar in that they lead us to further elab brags on circuit breakers, for example, or order types that we might want to limit going forward. >> i would say one thing, i remember because i was back then at -- in a financial firm, but i think one thing 23 years on, though there were computers back then, nothing like we have now. this whole concept of trading in nan no seconds and microseconds and automated traders and why both of our agencies have active reviews, we have an active review of high frequency traders looking at issues of colocation where they put the computers, exchanges are, looking at issues with regard to account identification and all of the issues in terms of access to the markets of these high frequency traders. that's something really new in this market environment from 23 years ago. >> chairman gensler, let me ask you a question then with that comparison that you just gave.

we need the s.e.c. and your group, the cftc, to step up to the plate and ensure that such market disruptions don't occur in the future. do you have enough funding and authority to prevent such an event from reoccurring? >> well, i thank you for that. we were sorely undfunded agency and shrunk 23% in the eight years before this administration. with congress' help we're back to just about the size we were ten years ago. and we've put in a request over-the-counter derivative reform came into being to grow from where we are. we need more enforcement lawyers, cops on the beat and computer systems to stay up with the automated surveillance we need of these markets. >> do you believe that you have made -- well, i think my time

has exhausted and i thank you, mr. chairman. >> thank you. >> next we'll hear from gentleman from oklahoma, mr. lucas, five minutes. >> thank you. >> five mr., mr. rice, from california, or oklahoma, as the case may be. >> thank you, mr. chairman. >> i think it was london economist that wrote, gave us a british perspective. they said when congress doesn't understand or like something, like work or investment, congress has a tendency to further tax it or legislate it out of existence and i was reminded about that when the legislation was referenced earlier and i wanted to ask chairman schapiro, there is legislation here in congress for a transaction tax on every financial transaction, and i was

going to ask you, is the solution to slow our markets through this transaction tax on financial transactions or is the solution to speed up our protections through real-time sirc skuts breakers? i mentioned earlier in my opening remarks the concept that germany has employed, with respect to looking at individual stocks, and individual stocks fall more than, you know, 5% in five minutes, then you have those circuit breakers go into effect until the markets have sorted it out. and it just seems to me that if we put this transaction tax on trading, what we're really going to do is provide less liquidity. i wanted to ask if that's a valid concern there and your thoughts. >> let me say i have studied the deutsch individual stock mechanisms and formed very much our conversation we had with the

exchanges yesterday. my personal view is that if we can do circuit breakers on individual stocks, depending upon the velocity with which they are declining in value, it will allow us to take a toum jute for some period of time and that every market must honor that time-out. we will have done a lot to make a difference here. i think it's important for us to do that in relatively short order. i guess i'm -- i tax policy is way beyond my pay grade and really my depth, but i don't -- i just don't have a view, i guess, about whether imposing a transaction tax would be an effective mechanism to slow the market or not. i just don't know what the impact necessarily would be on high frequency or algea rhythmic traders. >> my colleagues have brought it up on the other side of the aisles so i thought i would pursue that. let me ask you another question, and that goes to the events on thursday. does the situation justify

looking at trying to put all of the markets under one regulator? you have ek quickties, options, future markets, they're all interconnected, they're all core lated against each other, and we pass a regulatory reform bill out of the house last year which i think moves us in the right direction but you still have two separate agencies with two separate sets of rules and i just think about some of the studies that i've seen where, whether you're a liberal or conservative or in the center, these think tanks and economists that have looked at this have all asked the question, you know, if you have the same entity trading the same products but two different regulators with two different sets of rules, aren't you compounding the difficulty here? and isn't this simply the result

of not being able to move forward with real world class regulation. i would like to ask you, chairman schapiro, for your view on that. >> certainly. let me say the s.e.c. does have jurisdiction over all the equity and option markets. we don't over the future markets. i know chairman gensler has heard me say before, i think if we were writing on a clean slate we would not create the regulatory structure around these incidents or market participants we have today and there would be efficiencies gained by merger of the two agencies. but i want to hasten to add that i -- and i was ftc chairman quite a few years ago and been around both agencies many years. never in the history of those agencies have i seen closer collaboration or cooperation or willingness to support each other as we try to get done the things we think are important in each of our marketplaces and so while we don't have a merged agency, i think we have -- >> very good.

>> the next best thing. >> my last question real quick. is there any evidence that the uptick rule would have prevented this calamity on thursday? i recall reading in an s.e.c. study which said there's no way that the uptick rule in today's markets could be of assistance. what's your view on that? >> you know, as we know we did pass a new version of the uptick rule, circuit breaker, that's not no effect yet. it's possible new rules may have helped. but what we actually understand is that the level of short selling as a percentage of trading volume during that critical 30 minutes from 2:30 to 3:00, was lower than it was at other times during the day. so, to the extent the sales we saw were long sales, the uptick rule would not have made a difference. >> it seemed to be a lack of liquidity problem. >> to the extent they were short

sales, obviously some were looking at it might have had some impact. >> yeah. thank you very much. >> thank you very much, mr. royce. >> and now the gentleman from north carolina, mr. miller, five minutes. >> thank you, mr. chairman. i assume that the value to our economy of securities markets is that it matches people with money to invest with people who can put the money to productive use and the usual justification for high frequency trading is it adds to liquidity. and i can understand, for instance, someone who thought they might buy a house for investment might need to sell it would be reluctant to buy a house because they might have trouble selling it. i really don't recall before high frequency trading, there was that much difficulty in unloading a stock. has it really -- is there any evidence that people are more willing to invest in stocks now because of increased liquidity and people who really want to buy and hold a stock, who actually want to own the

company? >> i don't want to dodge your question but i do want to say this exactly the kind of issues we're looking at in our high frequency trading issues we've published for public comment and dialog. we want to understand what is the role of high frequency trading. is there a benefit to our marketplace. are the interests aligned with long-term investors or at odds with long-term investors and because our markets serve the purpose as you say, allocating capital to useful endeavors to create jobs, we want to make sure nothing detracting from that. we are doing a very deep dive, comment period just closed about two weeks ago and we're working through those issues now. >> there now is a stunning number of trades every day. is there any reason to think -- and i know that you're still in the middle of this -- is there any reason to think that there are more trades, more purchases every day by people who really

want to own a stock, who want to buy it and hold it and invest in a company, we used to think of patient capital as being someone who would hold a stock for years, now patient capital seems to be a couple hours less. >> i don't know the answer to that offhand but i would love to have research done and see if we can provide you with more detail. there are just on this one day last week on thursday, there were 66 million trades. and what percentage of those were long-term buyers and holders, versus high frequency traders who held instantaneously, i don't have an answer. i would like to see if we could get one for you. >> the statistics or estimates i've seen are like 40 to 70% of trades are high volume. >> we've heard those numbers as high as 70%. >> okay. >> jon stewart had a piece the other night showing the number of times events in the financial markets have been called a perfect storm.

and they seem to happen every couple of weeks, which is maybe not the idea of the definition of perfect storm which is completely unpredictable combination of events that maybe happens every 100 years. they seem to happen every couple weeks. in looking at what happened, can you also look at what else -- i mean it seems unlikely this very thing will happen again. but something that we had no reason to think might happen, seems to be happening with disturbing frequency. can you look at destabilizing factors in the market generally so that maybe not this perfect storm will happen again, but other ones also? >> absolutely. and that's part of our broader market structure review that we're doing. >> okay. thank you, mr. chairman. >> thank you very much, mr. miller.

gentleman from oklahoma. >> thank you, mr. chairman. and chairman gensler, let me thank you for attempting to track me down on thursday evening. i was on a plane but i appreciate your attempt to call me and my role as ranking member. you mentioned earlier in your -- one of your comments in reference to last week that derivatives may have played a role. chairman is that a hunch? is that a gut feeling or something you see in all the reems of data you're working through now? >> they're derivatives on exchange future and we can see that data. i think my earlier comment was saying that we can't look right now into over-the-counter derivatives and with your support and this committee's support i think the bill you passed out of the house last december would at least in the future in a similar circumstance allow us to at least see that data. >> along that line, chairman, you've always been a vocal

supporter of the mandatory exchange trading for derivatives that are listed for clearing with little or no regulatory flexibility. after last week's trading activity and the listed equities market which is i think we would all agree about as liquid a market as you can have, do you still believe that mandatory trading is the sensible route to go for over the counter derivatives which are very ill liquid instruments and thinking about that reduced volume and reduced liquidity if there is a wild action or aberrant trade isn't the potential far more damaging? >> i appreciate the question. i still am. i think over-the-counter derivative markets which dwarfs all exchange derivative markets eight or ten times the size, i think we must bring the transparency there, not for all contracts -- there will be a whole group of contracts that are customized, a whole group that aren't listed, even if they're clearable that aren't

listed, but i think that for te portion of the market that can be listed and has some characteristics that will add transparency, we should have exceptions for block trading if somebody is doing a large transaction it's recorded afterwards just as it is in the security markets now, but the events of last thursday are important to look at. they don't change my overall view that we need to bring transparency to the off exchange or over the counter derivatives marketplace where we can, not in the customized portion of the market, but in the more standardized portion of the market. >> ultimately when you do in your good folks over there and your friends at the s.e.c. grind through all of this and come up with some sort of determination we will have a much better feel. i still personally have to believe having watched what the ad committee did and working in conjunction with financial services, trying to be a bit more rational in how we handle

these derivatives i think was the route to go. ultimately after last week, we'll reassess the situation, but i just wanted your perspective on that because while both of you have indicated today there was no fat finger, no magic keystroke, no great confusion in somebody's software, nonetheless, if whatever did occur could have such an effect on the most massive, most liquid market in the world, it does cause concern for me about these other markets, these other instruments that don't even begin to approach that. >> and that's why i think it's important that we have strong risk management in the clearing houses that the congress has been supportive of, but also that these exchanges for the derivatives have very strong rules. i think the futures market has some very important guidance, the four that i mentioned

earlier in not being put prices in and having the pause, the five-second pause that happened on the futures market last thursday, was, in fact, right at the bottom where the order book got refilled. and the mention that chairman schapiro is talking about trying to do that across the securities market i support her initiative on that. >> one last brief question if we determine what happened, what are the odds it will be something of a proprietary nature you won't be able to share that with all of us in the public? >> we plan to make our findsings public to congress and this committee. next week will be an initial findings of staff, if there was a need to talk about individual trading information of individual accounts then we would work with this committee to do that in the appropriate setting. >> i look forward to letting the chips fall where they may. thank you. i yield back, mr. chairman. >> thank you very much, mr. lucas. we will hear gentleman from

georgia, mr. scott. >> thank you very much, mr. chairman. first let me commend yous, chairman schapiro and chairman gensler, your presentations certainly give us all confidence that you've got your hands around the problem. while you're looking for the causes, you have certainly shown that you've put certain measures in place to give confidence to investors to keep on investing with confidence. the seems to me, though, that what we really have here is a way we're trying to find to stop a free fall in a free market, in a free economy, while it is very important to keep the markets free. that is the strength of our markets, the freedom, and so as we move with controls, my question has to evolve around

this element that you're presenting as the most basic means of controlling this free market, so at the same time, making sure it is still free to function in the beauty and the strength that it has, and your instrument for doing this apparently is the circuit breaker. and the circuit breaker basically is a function of time increments, it's the function of pricing. and i'm wondering how do you -- how will you determine that? who will determine that? will it be the increment of 15 minutes if it goes down 5% or would it be two or three hours if it's -- goes down 10 or 20% and will it apply across each exchange? we have seven of those

operatives. or would it apply just to individual stocks? how simply would that circuit breaker work and allow still for the freedom of trading? >> congressman, that's a great question. i think it's important to note that we very much believe in the market and in the market mechanism, but i don't think anyone would argue that when the market went down 900 points in a very, very short period of time, 500 points in a matter of a couple minutes the real forces of supply and demand much operating. and we clearly had a problem that was related to the fact in my view we had markets operating under different sets of rules. we also had some other issues about liquidity leaving the marketplace, certain types of orders, exacerbated that, the use of something called stub quotes that allowed transactions to be executed at a penny contributed to that. but clearly something didn't work unrelated to market forces that we normally applaud and

think make our markets better. the circuit breakers that we're talking about with the exchanges would be designed based on long-time experience in other markets around the world which already have circuit breakers on a stock by stock basis as well as the experience for the new york stock exchange which already has the equivalent of a circuit breaker which i'm sure they'll talk about in their testimony on the next panel. bringing the collective experience of all those markets together with the ultimate approval of the s.e.c. for any rules that would institute circuit breakers, i think gives us some confidence that we'll be able to get it right and if we don't, we'll have to revisit it and make adjustments. on a market wide circuit breaker, as we have in our markets today that applies across the equities options and future markets both the s.e.c. and the cftc would ultimately decide whether changes to those existing circuit breakers are appropriate. >> part of the problem is, is

the lack of uniformity across the markets. >> absolutely. >> who in your estimation would be that entity that would make that determination at that particular time that circuit breaker goes into effect? >> there are two ways to do it. the way i favor, quite honestly, the one that has people knowing every day when they walk in, that the price of -- if a stock moves and these are just examples, 5% in five minutes, that the market for that stock will be shut at every place it trades for a period of three minutes or five minutes or whatever is appropriate. the certainty of knowing ahead of time, i think is of enormous [ inaudible ] to market because they thrive on that kind of sert itty about what the rules will be. another way to do it would be to allow the listed market so if it's the new york stock exchange stock or new york stock exchange to be able to say we're shutting down or we're going into slow

mode or turning off the electronic systems for one minute in this stock and all other markets would have to follow. that doesn't provide all of the up front certainty we get from the circuit breaker. >> let me just ask, my time is up, but would this circuit breaker also work for a dramatic rise in price of stock as well as a lowering? >> there seems to be less appetite, i will say, for a circuit breaker on the upside. >> and if you had your druthers, would we have a centralized one entity for determining when the circuit breaker goes or would you -- would you recommend that each of the major exchanges have their own individual and that reaction sets in for the others? >> i think there has to be a minimum circuit breaker that applies across every market that

trades whatever the stock is or we will have exactly the problem we had on thursday. >> thank you m chairman. >> your time has expired. gentleman from texas, mr. hinsly. >> thank you, mr. chairman. i've been here since the hearing was gavelled into order and noticing the title of our hearing, what happened and what is next. i don't think i've heard what's happened, but i've heard a lot of debate about what's next, which i would somewhat question the wisdom of debating what's next when we don't know what happened and perhaps i missed something, but i think chairman schapiro, i believe i heard you say that you're working around the clock to find the cause, but you don't have an answer today, is that a fair paraphrase of what you said? >> that's fair. >> and that you will share the trigger as identified with the public when you identify the trigger? >> as we -- well trigger or

triggers. >> trigger or trigger. >> understand the causes. we will share those with the public. >> chairman gensler, i think i heard you say something similar, that your people are diligently fact finding at this point. but you're not prepared to announce a cause of this? >> well, i would say that i think the four factors we're going to continue to research and see if there's a fifth or sixth, but the four factor, the turbulent environment the markets, if i can use the airplane analogy was in, a lot of signaling vices, and what happens to market participants when you see bad signaling you start to sell. you start to, you know, lay off risk, if i can use a market term. thirdly, there were these liquidity providers, some active traders, stepping back from the market, and i think there was also others, not just the one we've identified but probably others we'll find in more research, saying in a down

market we need to hedge, we need to put on bona fide hedges. >> is it fair to say then, that certainly you have localized individual factors worthy for the research, but you still have yet to draw a conclusion as to the trigger for this incredible violent market volatility of last week? >> i think we're going to report a staff preliminary findings next week that will have more in it but there is a factor we've definitely identified is that across the securities market, that individual securities trading down to a penny a share, if i can swim outside my lane as chairman schapiro said, really is not acceptable in the capital markets when they were moments before $40. that's something that cross market pauses or circuit breakers are about. >> it seems like to some extent, though, that the hearing has concentrated less on, perhaps, what is the underlying cause and has kind of turned into a debate

over high frequency trading, its relative benefits or relative cost. i have in my hand a editorial that was written, chairman schapiro, bit one of your press sessers that appeared in "the wall street journal" about eight or nine months ago. in the editorial he, quote, due to the rise of high frequency trading investors large and small enjoy a deeper pool of potential buyers and sellers and a wider variety of ways to execute trades. he went on in this editorial to write, quote, choice abounds and investors now enjoy, faster, reliable execution technology and lower execution fees than ever before. all of that contributes significantly to market liquidity, critical measure of market health and something all investors value. do you have a comment on your predecessor's thoughts?

>> i do think investors have a lot of choices today. i think that's generally a good thing. i do think that they benefit from narrower spreads and lower costs as a result of competition in our marketplace. but i also don't think they benefit from the kind of conduct that happened on thursday where because in part of rules across marketplaces, investors orders were treated very differently and we had the phenomenon of a stock at $40 trade at a penny. so while we don't know all the causes of the volatility, we do know what some of the symptoms were and we can go ahead and tackle those, i think understanding we want to be cautious, we want to be thoughtful, we don't want to harm what's good about our markets but i think we run the risk of losing investor confidence if we don't move forward to fix some of the things that we believe and the exchange believes are problems.

>> if i could have you comment on another part of his editorial dealing with the suggested 25 basis points per trade tax on all trades. chairman, such a tax has been tried from 1914 to 1966, a transfer tax set at .2% on stock trades. that expense was simply passed on to investors, a tax on such transactions would probably drive high frequency traders and liquidity they bring to foreign markets. i know you didn't want to get dragged into tax policy but do you have an empirical observation on whether or not historically such taxes have been passed on to investors? >> i really don't know the answer to that. i assume most costs are passed on one way or another. >> thank you for your time. >> i yield back. >> gentleman's time has expired. >> thank you, mr. chairman. thank you to chairman schapiro and director cook for your

testimony today. in the wall street reforms that we've already passed in the house and that are pending in the senate, an amendment that i authored and that was included will require evaluation by the oversight camp council, the systemic risk council, to evaluate -- identify and evaluate potential threats to the stability of the financial system. it would also require that they establish plans and conduct exercises in the same way that the department of homeland security and other agencies do to potentially avoid or respond to or contain emergencies that would happen. and then they'll provide a report back to congress on the results of what they've anticipated and what they've discovered. my question to both the chairmen is the functional regulators such as yourself already have the authority to do those types of exercises and plan ahead for

eventualities, however slight you think the probability. can you share with me in terms of those types of exercises, reports and plans what had been done prior to may 6th in each of your organizations? i'd start with chairman schapiro. >> sure. i may ask mr. cook to jump in here. because we do something called an arpe, automated review policy examination to test the quality of their systems, security of their systems, robustness and resiliency of their systems and their backups. that's a routine program we engage in every single day. we're also gathering data as i've said probably 300 times here and everyone's tired of hearing through our market structure concept release on issues that will relate in some part to systems, and particularly the impact of strategies that are utilized by ail go rhythmic traders and high frequency traders on the quality and integrity of our markets.

. >> chairman gensler. >> i just found this surveillance. we're fortunate to be able to get the trading data every day. what we got last week was not unusual because we under our statute are able to get the whole set every day. every friday the five commissioners sit in a room and get a surveillance brief on the activities of that marketplace for that week. but then we also look out over the next week as to how the futures market is coming together. so we do it on a realtime basis week to week in terms of our surveillance of the markets. in terms of last thursday, if i might say, secretary geithner had us and the whole president's working group together. i think it was a 4:15 call. i can't remember the evening call we had. the first thing friday morning again. maybe there was a second one friday. i can't recall. but, i mean, so the president's working group may sort of mutate into this council in a sense. but it was a very active

cross-governmental collaboration thursday evening, friday and over the weekend. >> thank you. director cook, did you want to add anything further? okay. i guess my question would be, then, moving forward, do you anticipate further rigorous planning out of the box thinking about potential scenarios that you may not otherwise have anticipated? >> absolutely. one of the reasons, we proposed just a couple weeks ago a large trader reports system which exists -- on the equity side so we can identify much more quickly the activity of high frequency traders in the markets on a routine basis. and the commission will vote in about two weeks on a proposal to create a consolidated audit trail so we can track from the inception of an order through execution and settlement, every modification, every change, every hand that touches that order through our market

processes. and we can then do these kinds of market reconstructions far more efficiently than we're able to do this one right now, having to combine multiple audit trails from every one of our trading venues. >> a lot of trails are after the fact. preemptively will you be doing scenarios anticipating if someone seeks to do harm in the market or manipulate the market in some way for their own gain are you anticipating those potential attempts and running through scenarios? >> i think we are doing that now. certainly thursday heightened that. i think doing the audit trading and understanding better will enable us to think more creat e creatively about what kind of scenarios we have to be thinking about and worrying about. >> we do similar things internally. we don't think that's enough. one of the reasons we came together to join -- form this joint advisory committee is really have outside experts looking out over the horizon and saying what's the next emerging

risk we ought to be looking at. >> i see my time has expired. i yield back. >> thank you. we'll now here from the second gentle lady from illinois. >> last but not least, thank you, mr. chairman. following up on that, i think that some of us might recall we do have chicago first, which is really a public private partnership that was created in 2003 legislation. this was following 9/11. that was a model for the rest of the country. i think there's quite a few of these groups. have you worked with them at all? >> i have not. >> okay. maybe we can discuss that at some time later. my next question was for chairman gensler. >> actually, the answer on some continuity initiatives, we have. we have worked with them. >> as you know, cme uses a number of risk management

controls. can you explain how cme was able to contain the contagion that originated in the equities markets, specifically can you -- can you explain how the stock price logic works? >> there are a number of risk management controls in the futures markets. this stop, price logic, is one of four. it works within their computerized trading program. as the market goes down or up, if the orders in the book are going to be spreading so much that there'll be a cascading of what's called stop loss limit orders, it's a mouthful, but if there's a cascading that i believe goes more than 6.5 points, then it will actually pause, give five seconds for more orders to come in, and then it will, you know, do an

algorithm to trade it off. that's what happened at the bottom of the market at 2:45: 28. >> should a similar rule be applied to the other markets, equities? >> well, i think that chairman schapiro is talking different -- because there's different characteristics. across the platforms to see if there's something broadly similar, but not identical. >> broadly similar but not identical. we're looking at individual stocks having circuit breakers that would operate to stop trading for a period of time so that algorithms can be refreshed and additional liquidity can be attracted to the markets. >> well, next, then, has the trading technology gotten ahead of the regulators? if the regulators aren't ahead of the technology, won't we have problems like last thursday? >> well, i'm very proud of the group at the cftc.

i inherited most of them. it's a terrific group. but i do think we've been underfunded on technology. we have a significant investment in front of us to do what we call automated surveillance and compliance. we're trying to build the flags and alerts that look at the hundreds of thousands of transactions a day by basically what's called simply exception reports and flagging them for good people like the man sitting behind me and his team. >> chairman schapiro? >> we are significantly underfunded in technology. our discretionary technology budget for development projects is still 50% below what it was in 2005. and our markets are vast and complex. >> i know. i've asked you this question before. how old is your technology? is it 10 years, 20 years? >> it probably depends system by system. for example, congress has been generous in the past year. we've been able to build some new technology to consolidate our tips and complaints and referrals more effectively. but we have some very old

systems, some of which i recall from when i was a commissioner in the early 1990s. >> and as you talked about your markets, i think it's been said that you're still aggregating data from 50-some electronic trading venues. and this really highlights the fragmented nature, doesn't it, of our markets? and while this -- could this fragmentation maybe be at least partially to blame for this thursday's market drop, is it also hampering the search for explanations? >> it's making the job more complex. i have been envees you of chairman gensler's ability to down load files from a single marketplace largely and conduct their analysis. we have to do it, down load vol luminous files from multiple market participants. 19.5 billion shares of stock

traded on may 6th in 66 million transactions. once we're done analyzing that, we then need to compare our analyses with the cftc so we're sure we're linking the two markets together appropriately. so more technology would absolutely enable us to do this job a little bit faster. >> is there -- is there a plan and time line for implementation of updated technology? >> we still don't have the resources to do much of what we'd like to do. the commission will consider in the next couple of weeks a proposal to create a consolidated order audit trail that will give us vast amounts of data and make this kind of reconstruction far simpler than what we're going through right now. that will largely be developed by the markets, and we will have full access to the data. >> thank you. >> gentleman from massachusetts. >> thank you, mr. chairman. i want to thank you for coming

today. i also didn't expect a whole lot of final answers today. i have faith that you will rip this apart for the next several weeks or more and come back with a more thorough response. i think that's an appropriate thing. i do want to focus on one thing that i do think is within your purview and not so much for conclusion as questions. particularly, chairman schapiro, the decision to cancel trades. i have no problem with the concept. my concern is where do you draw the line. if you did as i understand give or take 300 entities or whatever it might be, if you're going to cancel some, why not just cancel them all? pick out the time frame when people started to fall off the table, and then from that point forward, something went wrong -- because no matter where you draw the line somebody is going to get hurt and somebody is going to sue somebody. and they're probably going to sue you, not me. so that's okay. but i just don't understand why you drew the line that you drew. >> we didn't draw the line. although let me agree with you that this was a highly

unsatisfying process from my perspective. under the rules of the exchanges, they draw the line about when to cancel erroneous trades. they met right after the market closed on thursday. >> they, who? >> the stock exchanges. and they come up with a common standard to cancel trades at prices that they think are sharply divergent from the previous day's close. they selected, and it would be great to ask them i think at the next panel -- >> good idea. >> 60% off the prior -- or the 2:40 trades. the last probably really solid trades in the market. a threshold, a lower threshold, would have resulted in many, many, many more trades being canceled. which would have had some ripple effect in the markets in terms of traders who were hedged in other markets would have had this trade canceled but their hedges still standing. but it's clear that it's -- it's not a process that i think works to the advantage of investors.

when we brought the exchanges to town on monday we asked them to think about how with can make a more certain and clear process so that investors know up front what trades might be broken and what trades might not be broken if we have another kind of event like we had on thursday. >> i would -- i hope -- is this issue now settled? it's done? going forward is one thing. but for this particular day, is that decision final, in stone, not to be reviewed? >> i believe the exchanges will tell you that decision is final. i expect that there will be -- >> i hope they have good lawyers. >> well, you may be right about that. >> oh, no, i'm right about that. i'm a lawyer. i'd sue you. and depending what happened to my pension fund, i might be suing you. i don't know. i think it's ridiculous. i think it's inappropriate. i think it's arbitrary. again, i'm open to hearing answers. if not from you i will ask the next panel. but 60% is some magic number and 59.9% isn't?

that's ridiculous. >> exactly. i share your concern. we're going to fix this going forward. >> mr. gensler, again, i'm not exactly sure you did the same thing. >> no. there were no busted trades in the futures markets. the rules in the futures markets are very tight in terms of bust -- what's called a busted trade. that they have to occur within a certain number of minutes, really, after the trade. then there's a certain -- i didn't describe it earlier, but a certain limit as to how many ticks away from any future that trades that could actually generate that. so they're very prescribed rules. >> is that subject to a specific standing rule? >> that's correct. >> i may argue with what the rule may be. at least everybody who gets into it know what is the rules are. >> it's very transparent. >> that's i think is the problem with the other exchanges. the lack of transparency. we've got enough problems with this generating hundreds of thousands of lawsuits on the basis of probably billions or tens of billions of dollars doesn't help the situation. i will ask the next panel. thank you, mr. chairman.

i yield back the remainder of my time. >> now we'll hear from the gentleman from california. >> thank you to all three chairman and director cook. i'm trying to understand what we know and what we don't know at this point. chairman schapiro, i guess, then, and chairman gensler, chip in at any point if you want. if we focus on these well publicized trades, the penny, the extentures and so forth and png which didn't go to the penny but went down those, those trades. those trades occurred and were consummated, construct? >> yeah. >> at the time? >> yeah. >> someone bought and sold those stocks at a penny. what sort of volume transacted at that level? do we know that? >> i don't know that. i would be happy to provide it. i know there were about 300 stocks where trades were broken because they were 60% or more away from the market. and i believe the last number i was told was about 19,000

trades. >> 19,000 trades at -- >> 60% away from the market. >> across all those securities. so a significant volume. so these weren't -- i mean, in a given security was there 1,000 shares traded at a penny or was there 300,000 shares traded at a penny or do we know? >> id be happy to provide that for the record. i don't know we have all that data yet. . >> where were these trades transacted? new york stock exchange? nasdaq? other exchanges? >> many places. that's the nature of our very fragmented and dispersed marketplace. nasdaq. no stock exchange trades basically more than 20% of the volume or 25% of the volume nits own listed securities. because we have so many trading venues. so they trade in markets like nasdaq, new york stock exchange, the ecns, and in dark pools where they're not so transparent and internalization by broker/dealers. so there are multiple ways for a

securities transaction to be executed. >> so, again, if we take a given security that traded at a penny, those transactions occurred on multiple exchanges at a penny at that point? or do we know? >> we don't know. >> that's the part of what we -- >> what we're working on. >> -- we don't know. okay. then i suspect a lot of this is what we don't know. what i think we need to find out before we can, you know, jump -- you can or we can jump to any conclusions about where this should go. i understand we have stop loss orders and those turn into market orders. but then how does it -- how does it run through, if that happens at 30 bucks, how does it run through everything to a penny? how did that -- how did that occur? i understand at that point it's a market order and if the market's a penny, the market's a penny. somehow it's got to run from 30 bucks to a penny without any -- were there significant transactions all the way down the line or did we have a

20-point gap? >> in some cases there were. in some cases there weren't. as the market -- as the orders got away -- started to cascade down, there were not buy orders on the books of these multiple venues that could soak up that selling activity. and as there was continued pressure from the seller, nervous investors who'd put in stop loss order, they convert basically into a market sell order as they -- as they go down. the sellers that were remaining in the market ended up executing against what we call stub quotes. that's where you get the penny price. a market maker does not want to stay in there and provide liquidity. they have to make a two-sided market. they'll make a one cent to a $100 market. that one cent price is out there in the marketplace. and some of these orders hit that. stub quotes, i think the view of exchanges we know yesterday was universally that they serve no purpose in our marketplace. so that's another issue that we

have on our immediate agenda, consider whether either we need to have real market maker obligations to make genuine competitive markets, tight spreads, or get rid -- >> if i could say, there's a difference in rules and futures and securities. i'm not sure you could translate one to the other. there's no stop loss market orders in the futures market. on both of the major exchanges it's a stop loss limit order. meaning when the stop is hit -- a stop is when the price goes down and it hits a price and the order goes in, it has to have a limit to it. >> let me just end -- ask one more question, then, before my time is running out. which is, what has changed -- this could not have happened, i suspect, 15 years ago or 20 years ago or 25 years ago or 40 years ago. particularly if you go back to traders on the floor with a piece of paper, you know, 40 years ago or 50 years ago or so forth. but i guess what has changed

that enabled that kind of significant -- because, you know, market drk stop loss orders is not a new thing. this has been around for a long time. what's the new thing that occurred that caused this huge -- >> i think volatility is a part of markets and was in 1987. huge volatility. i think the change is the floor traders, the specialists or the pit traders in futures are now more and more in some office with computers. and the computers are located right next to the exchange engines. everything's down to nanoseconds rather than those liquidity providers used to be either a floor specialist or in the pit. that's one thing that's changed in the 20-some years. >> i would say while we did have tremendous volatility in october of 1987, we have many more market participants who don't have the same sort of

affirmative obligations to the marketplace that we had at that time with specialists, with market makers on the nasdaq stock market. so speed, volume, velocity of trading, volatility and lesser obligations to the market as a whole. >> my time is expired. thank you. >> thank you very much, mr. campbell. now we'll hear from the gentleman from illinois, mr. foster. >> thank you, mr. chairman. does anyone yet understand the origin of the tremendously high share prices that were bid -- that were at least reported, $100,000 or so? were these algorithmic bids or what was the nature of them and what was the nature of the firms -- >> i believe that's what we're still looking at. i'll ask robert to jump in. interestingly there were 20 stocks that traded at 90% above their 2:00 p.m. price during that period when there were, you know, 250 or more stocks that traded at 90% below their 2:00 p.m. price. but i don't know if we know yet the reason. >> no, we don't.

there are many more that traded below their 2:00 p.m. price than above. we do not yet know the nature of the orders that came in, that fed into those prices above. >> so you don't even know who made them? >> not at this time. that's part of the information we're gathering together, because we're pulling together the information as to where the orders originated at which trading venue, and then we'll go back further and find out who put them in through their brokers and -- >> this many days later you don't know who it was that made these funny sounding -- chairman gensler, would that be the case at -- >> no. in the futures market we didn't have either. there's so many curbs and limits in this risk management. one of the things that high frequency or algorithmic traders do, it's called sniping if i can use a term. the computers actually put in a bid one contract at a time or one security at a time and sort of try to pull out the liquidity. and find it. if there was a resting order, a resting bid at a penny or a

resting bid at $100,000, the computers can kind of strip through and maybe find it. that may be. that's just a possible thing to look at. it may be that that's what happened. >> are there mandates that automated trading firms appropriately version and archive their algorithmic code and data bases so they can reproduce their trading decisions after the fact in the course of these investigations? >> we've actually asked for some of these traders to sit down and see their code. our folks in our division of market surveillance are sitting down this week with a number of the largest ones and actually looking at their codes. >> right. but is it a possible response? they say, oh, we just don't know, we had some version but then we overwrote it? are there enforced industry standards so that you can actually go back and say what version of what cold were you running last wednesday afternoon? >> if they're regulated

entities, yes, we can see their code and they need to freeze their code. and we've reminded people post-thursday that we want the code frozen so it's not changed. if they're not regulated entities, we have to get that information via a subpoena. >> okay. could you explain briefly how trade busting works on synthetic positions? if the underlying stock is determined to be, you know, broken, does that automatically -- how does that work? is there an agreed upon way that that should happen and is that the way it happens? >> with respect to the -- i can speak to how the securities trades are busted. as i think we've talked about, it's a pretty unsatisfying process because it lacks real clarity and consistency for investors up front. the exchanges in this situation, this is unusual because your normal trade bust situation is a single stock. something goes wrong in the technology and you need to bust a lot of trades in one stock. here we had hundreds of stocks

where trades needed to be busted because prices were sharply divergent from where they had been on the previous day's close. the exchanges meet. they come up with a common standard so that they're all busting trades at the same level. >> my question was how does that percolate back into positions that are derivative positions on equities -- >> i don't believe it does in term of velocity. it does have an impact on them if they've hedge add position that's now busted. they've got a hedge. now they're exposed. >> in the securities markets, the options markets would make the decision of whether to break the trade if the underlying security trade had been broken. in this case i believe very few options trades were broken. but some were. again, the process was not fully coordinated in a sense that if the derivatives -- if the options -- the options markets made that decision separately from the securities markets, and that's one of the things that

we're looking at going forward. >> and though i don't remember everything in cme rule 588, which is the busting rule, what we learned last thursday, the indices themselves, s&p and dow, didn't reprice their indices. they didn't then come back and say there was a different thing. i know that that was relevant to those markets. >> okay. let's see. would you say that overall what happened last thursday strengthens or weakens the case merging the cftc and the sec? i guess, first off, you all know my position that they should be merged and moved to chicago. >> okay. i'm with you on half of that. i agree -- i have long held the view that the two agencies should be merged. that the participants in these markets, the products are increasingly similar. and the markets are increasingly linked. and that there would be

efficiency and economy of scale to a merger. but if the political will for that to happen doesn't exist, i think, as i said earlier, this is the best working relationship in my many years of being around these two agencies i have ever seen in terms of collaboration and cooperation. i'm not sure that the events of thursday would have played out differently had there been just one agency. >> do you share the development of software tools that you're both frantically developing to analyze this or is that just -- you have independent groups? do you have any comments? >> i will tell you it took an act of congress to allow us to create a joint advisory committee. the ability of federal agencies to actually share things mystifies me in its limitations. >> we actually want to thank you. you didn't know you were voting on it at the time. but it was part of the appropriations bill last year. congressman lucas probably did know about it. but i think that our two agent sis and i thank chairman schapiro for her support these

last 11, 12 months i've been in this. the will of congress has been since the 1930s really that we have one agency, strong agency in the sec overseeing its orbit. another agency overseeing foreign exchange derivatives markets. now we're trying to fill this gap in the over the counter derivatives market as well. >> thank you. yield become. >> thank you very much, mr. foster. that completes our questioning for this panel. i'll just take a moment before we excuse you. i want to thank both of you again and i want to reiterate something that mr. scott said in his questioning after hearing the testimony from our two regulators, i feel a lot more secure. i'm not certain i could tell you why, but i feel a lot more secure of it. and i look forward over the next several weeks to open disclosure with the american public and the congress as to what you find as soon as you find it so that we can get to a final conclusion, but in the meantime, to

participate in such rules or changes that can help prevent what has happened last thursday. and with that, i thank you both very much. we're going to allow you actually to get out so that you'll be able to enjoy the rest of your day. >> thank you mr. chairman and the committee. >> thank you.

first of all, may i thank you for appearing before the subcommittee today. and without objection, your written statements will be made part of the record. you will each be recognized for a five-minute summary of your testimony. first of all, we have mr. lawrence leibovitz, chief

operating officer, nyse euronex. >> i'm the chief operating officer of nyse euronex. we commend the subcommittee for your rapid response to the events of last thursday. as you know we've begun a dialogue with our regulators in our other trading venues and it's been very productive. we're committed to working with you and other market participants to restore confidence and enhance investor safeguards in the future. today i'd like to discuss three things. first the high level cost of the events last thursday. second clarifications about nyse's market model and how it worked. third, our recommendations going forward. it's understandable that everyone is looking for a smoking gun behind last thursday's dip. however, the circumstances are more complicated than that. i'll leave it to the regulators who we just heard from to link the interactions of various markets. but from our standpoint we see no evidence of a fat finger error or market manipulation. we also note that more and more our markets within the u.s. and

indeed within the world are intertwined. however, we do see the following. elevated market activity coming from adverse european news, including huge and broadly based wave of oerds and quotes at around 2:30 p.m. a significant reduction in market liquidity as measured by the size of order books through the day which accelerated dramatically through the downturn. various microstructure issues that resulted in certain marketplaces not interacting with one another which exacerbated the liquidity effect. the nyse has embraced electronic trading. we believe our market model provides the best combination of cutting edge technology with human judgment. the nyse hybrid market rules expressly provide mechanisms to mitigate volatility which we believe is a critical piece of our offers to listed companies and investors. we incorporate in our trading structure a type of circuit breaker mechanism known as liquidity replacement points or

lrps which temporarily and automatically pose trading in stocks when significant price proouchlt occ movement occurs. let me be clear. the lrp mechanism does not halt trading. instead for a short time trading is automatically paused to facilitate more accurate price discovery and prevent the market from a sudden and significant move. during this pause our quote is visible to other market participants and new orders are accepted. to jump on chairman again ler's analogy, our lrps are analogous to taking the controls of a plane off autopilot during turbulence. this is not meant as a comment on other markets or other market models just to clarify from the nyse standpoint what we saw. during the 2:30 to 3:00 period market share on nyse was 5 percentage points higher than usual during that time of day.

the participation rate of our designated market makers form amly known as specialists was equally strong. this was evidence our liquidity providers did not walk away from the market as we actively traded during the downturn. furthermore to demonstration lrps protected -- erroneous executions far greater than on nyse listed stocks. lastly, the overall marketplace needed to cancel approximately 15,000 executions after thursday's decline. on nyse even though we handled the largest share of orders in the marketplace, we had to cancel zero trades because of the protective measures in our market. one note. lrps are not intended to prevent the market from falling. rather our lrps are designed to protect the integrity of our market by preventing a panic led downdraft in mitigating systemic risk. when we're in a slow mode, other electronic markets may choose to ignore quotes as permitted out

of regulation. the bottom line, while there's always room to improve lrps and other such mechanisms, these actually worked reasonably well on thursday. however, the mechanism is only truly effective if observed by other trading venues, and that's why chairman schapiro's plan for an industry wide trading circuit breaker is needed. in terms of recommendations, i want to focus on three main topics echoing much of what chairman schapiro stated earlier. the lrp system has worked, but marketwide circuit breakers are necessary and will be even more effective. the listing and trading venues have agreed to develop these stock level circuit breakers to pause trading when the price of a security has changed dramatically in a short period. once circuit breakers have been triggered in a security they will apply to all trading in a security wherever it takes place. second, the current marketwide circuit breakers were established long ago and are based on market moves of 10%, 20% and 30%.

there has not been a move greater than 10% in a single day post-2000. these levels will be tightened and the circuit breaker will be based on a broader index rather than a narrow dow jones index. third, the cancellation -- the rules on cancellation of trades will be further defined. on may 6th it was announced after markets closed that any trades executed at 60% above or below the last price at 2:40 would be canceled. this action was not predictable and caused confusion in the markets. we are working with regulators and other exchanges to establish clear cancellation rules for the future. those circuit breakers will help mitigate this problem substantially. to facilitate a review of extraordinary trading events there could be -- that would allow regulators to easily review market wide trade data. we understand the sec is developing such a proposal and we are committed to assisting in the effort. these and other important actions may best be achieved by consolidating market surveillance in one securities regulator, probably finra, which

would require an act of congress. we also at the same time need to ensure both finra and the sec have the full funding required to perform these duties. finally, the sec should continue its broad based market review to help find ways to improve our current market structure. in closing, we applaud the sec and cftc for working together to review the ents of may 6th and coordinate a response. we are committed to maintaining our ongoing productive dialogue with these agent sis and other trading venues. once again, thank you for the opportunity to appear. later on i'll be happy to answer any questions you might have. >> thank you, mr. leibovitz. now we'll hear from mr. eric noel, executive vice president, nasdaq transaction services. mr. noel. >> good afternoon. thank you for letting me speak to you today. we met yesterday along with our fellow exchanges with chairman schaprio to develop a strategy to combat market instability in

the wake of last thursday. we will act jointly to assess and implement changes to enhance the market's ability to handle unusual trading events in the future. markets are strong despite the 17 minutes of unusual trading that occurred on may 6 president p in fac . to understand fully may 6th you have to look at the state of the markets headed into last week. markets were nervous and operating during an unusually long upward trend. from a market low of below 1,300 march 2009, the nasdaq dock pot sit index has written steadily 2535 on april -- >> mr. noel could you see whether your mike is on? >> markets were also becoming increasingly volatile according to to the vex, which measures volatility of the s&p 500 expected over the next 30 days. note that the vix is normally below 20. by may 5th the vix reached the upper 20s.

may 6th and 7th it closed above 30. this increased volatility is tied to the escalating financial crisis in greece and europe. against this backdrop, we arrive at the afternoon of may 6th. first the dow jones industrial average was already trading off 272 points for the day and 500 points in the last three days. second, the chicago mercantile exchange was beginning to experience unusual trading activity. at the same time as equities handled heavily trading in the highly correlated equities to that future. volumes rose and prices began sinking rapidly at 2:42, yus before equity prices sank rapidly as well. at 2:45: 30 p trading became so volatile the cme triggered an automatic five second trading pause. the price of the future immediately leveled off and began to climb rapidly.

equities followed shortly thereafter. third, the nys ark exchange began experiencing data communications that hindered the linkages between it and other exchanges. simultaneously the new york stock exchange began reporting multiple liquidity replenishment points or lrps and gap quote ts that impact the trading of individual stocks in the new york stock exchange market. the dow dropped down 995 points total from the prior close. from 2:47 to 2:56 the dow recovered just as rapidly, rising 612 points from 9862 to 9974, down 387 points for the day. from 2: 56 to the close, the dow rose another 45 points ending the day down 342 points. it indicates the unusual trading activity on may 6th was triggered by a confluence of

unusual events including events outside the cash equities markets. nasdaq continues to investigate thursday's vents but has at present located no smoking gun that single handedly caused or explained thursday's events. each and every one of nasdaq's electronic systems functioned as designed and as intended. our execution engine, our market data feeds and our surveillance systems. we have detected no system malfunction or errant trade by a nasdaq member interacting with the nasdaq stock market, no nasdaq member has identified a system error or abrigs within their own systems. we think a circuit breaker should automatically help trading in all stocks and in all markets in measured stages. we would expect chairman schapiro as based on her testimony will have some announcements about what those finally will look like in the

very near future. we support the commission's desire -- cross market single stock trading halts. the important characteristics of such a halt should be of consistency across all the markets, initiation by the primary market and orderly resumption of trading by the primary market. we do believe, however, that trading halts and other regulatory actions should never be a tool used by a primary market or any other marketplace for any competitive reason or to disadvantage any other national market system participant. finally, we are explores other ideas that will improve and encourage high quality and containment on all markets. thank you for the opportunity to share our views. i'm happy to respond to any questions you may have. >> thank you very much, mr. noll. now if i may recognize the gentle lady from illinois. >> thank you, mr. chairman. i'd like to welcome my constituent, mr. terrance duffy, for joining us today. mr. duffy is the executive

chairman of the cme group. i thank him for joining us and sharing his expertise. >> thank you, congresswoman biggert. chairman kanjorski. i want to thank you for allowing me to testify today. it is widely known that futures markets are leading indicators for cash markets. our reviews of the market's activity revealed no suspicious or erroneous activity by our customers. the exchange did not bust or reprice any transaction. further, our analysis indicates the decline in the spider etfs and 3m stock preceded the drop. as i will show you in a moment, they were far more severe even after substantial price recovery in the s&p 500 futures contract. liquidity in the s&p futures and its effective spreads were considerably better than the spider etfs throughout the day on thursday. at this point it's premature to draw any defentive conclusions

as to what caused the extreme market volatility on may 6th. what we do know is there were a number of macroeconomic conditions as well as lack of operational harmonization. this resulted in the cancellation or busting of securitying transactions by the nasdaq stock market and nyse. in contrast -- performed smoothly despite significant market activity and volatility. the selloff and subsequent rebound in the s&p 500 index futures, while dramatic, was very orderly. our market -- our markets provided the liquidity investors needed to hedge against the turmoil happening elsewhere. as i mentioned earlier, cme group's s&p 500 is a leading indicator, not a cause of the decline in the underlying primary market. futures contracts by design provide an indication of the market's view of the value of the underlying stock index. this makes futures -- index

futures a valuable risk management tool for market participants. to illustrate this point, i'd like to draw your attention to these charts. when looking at this information, it is important to note there is a difference between futures and cash reporting. cash index values are only updated every 15 seconds. while futures prices are updated on a realtime basis. this means the futures market reflects conditions in realtime while the cash market has a 15-second delay. the first chart shows the comparative value of the -- traded on the futures market versus the equities market. it illustrates the blue line moved virtually in tandem with the spider etf market as well as the s&p 500 index which is the redline. you can see at 1346 p.m. the market had had time to attract liquidity and rebalance. and it led the recovery leading the dow jones to recover 400 points in three minutes. moving to chart two, this graph shows price movement in the e

mini s&p futures as well as 3m stock. as you can see the price of 3m stock declined much more rapidly starting at 1345 while the e mini s&p 500 hitting the low at 1345: 50. at which time you can see the market and the e mini reverses while the 3m stock continues to decline. market integrity is the utmost important to cme group. we have developed systems that maintain integrity in all of our markets including a number of controls to protect market user. for example, cme is the only exchange in the world that requires pre-execution credit controls. as chairman gensler mentioned, cme -- maintains functionality which causes the engine to pause -- would exceed predetermined levels. following the five second pause new ord rs would come into the market. this is a critical point. we believe this functionality and these protocols do not exist in the cash market. if they did, it would have been highly effective in eliminating

price dislocations in 3m and procter & gamble. furthermore, cme trading infrastructure incorporates numerous risk protection tools. they provide added safeguards to customers and clearing firms including stop price logic functionality, price banding and circuit breakers. as i mentioned earlier, stop price logic functionality helps to mitigate market spikes that can occur because the continuous triggering or the election of trading of stop orders. this is what happened last week with the e mini and s&p futures allowing liquidity to come into the market and ultimately leading to the rally in the equities market. we believe the focus of your review should be on the national market system. we support chairman schapiro's recommendation regarding harmonization across these platforms. we have seen no evidence that high frequency or other specific trading practices in any way magnified the decline on may 6th. in fact, we believe that high frequency traders in our market

provided liquidity on both sides of the market in this extraordinary day. we do, however, recognize that changes should be considered to avoid a repeat of the events of may 6th. we would make the following recommendations. as chairman schapiro pointed out, including circuit breakers for individual stocks such as those implemented by the nyse must be harmonized across markets. stop lusz functionality should be implemented across markets on a product by product basis. the circuit breaker levels of 10%, 20% and 30% and the duration of the halt and time of day at which triggers are applicable should be re-evaluated. in light of current market conditions to determine whether any changes are warranted. any such changes must be imlemted across all market venues. i thank the committee for the opportunity to share cme's views and i look forward to answering your questions. >> thank you very much, mr. duffy. >> move on to the questions.

i'll take my question period first. mr. noll and mr. leibovitz, listening to your testimony, i'm not sure anything happened on thursday. everything worked. is that correct? >> oh, i don't think any of us would say that everything worked. i think, in fact, what mr. noll was saying is his systems worked, but i think we would all agree that the market did not. >> what caused the market not to work? >> well, i think what both of us have found is liquidity fled the market just as through the day as the market was skittish. then an overwhelming wave of orders came in on the sell side that just built on itself. i think having the market wide circuit breaker in effect would have helped mitigate that problem. but, in effect, the market was illiquid just at the wrong time as sell orders broke into the market. >> i think -- mr. chairman, i think there's two things to observe that happened. i would agree with mr. leibovitz that, thft, the markets did not

behave normally on that day. i think my point was really our technology behaved as it's designed to behave that day. i think it's important to observe two things. one is, is that the market wide circuit breakers we do in fact have in place today were not triggered. because the market did not fall to the point where they were triggered. and, therefore, caused the market wide halt. i think chairman schapiro is correct when she says we should revisit those and reinstitute different types of market wide circuit breakers that will arrest those market wide halts as they happen. i think the other point she made vividly today which we certainly agree with at nasdaq is we do need a coordinated market wide circuit breaker across all the markets. we don't currently have on our books or the regulatory authority to eimplement. >> there was no problem on your part on either of the two exchanges with the fact that the new york exchange did a slowdown

operation, but nasdaq continued going right on and allowed the sales to pass through to the nasdaq exchange? that had no effect, is that correct? >> i think we would say that was a contributing cause to a confluence of events here. it points to what we would argue is the need for a coordinated stock by stock circuit breaker. >> right. from our standpoint, we don't think the fact that we were moving slowly exacerbated the effect. in fact, the fact that we were trading high market share, keeping the stock prices in line, might actually have helped. and the fact that other markets that didn't have circuit breakers at all like the nasdaq listed market had even more damage than in the new york listed market. but i think we can all agree that having uniform market wide circuit breakers would have helped in all events. >> i have a question. everybody wants to protect the private market and have the market function. but is this the first time you've made that observation?

either of the two major markets, that one set of rules was in place in the new york stock exchange, another set of rules in nasdaq, and that you weren't coordinated to operate in tandem together so that this could happen or you didn't realize this could happen? >> i think what's fair, mr. chairman, is, is that our markets are very coordinated in many ways. we have very similar corporate governance standards for our listed companies. in the -- as an example, not having to do specifically with trading, but for market wide declines, overall market circuit breaker, we are coordinated. we have open meet me lines that we use frequently during trading problems and technology problems. >> don't give me everything that you're coordinated on. we don't want to know that. we want to know why this occurred. >> i'm suggesting we speak often about many issue. the one issue that had never appeared yet as a significant problem between our two markets is the coordination of a stock by stock circuit breaker. >> what you're saying is because

it never occurred, you did not simulate the possibility that it could occur, and you did not cooperate together to put in place common rules that would have prevented it from occurring. is that correct? >> not exactly, sir. >> what i'm trying to drive here, obviously two free market operations are relying on either the united states congress or the regulators to take care of the problem rather than doing it yourselves. >> right. >> so as permitted by sec regulations, we do have different trading models. we rely on designated market makers who have an obligation to the market. they have a different type of trading model. so there are various areas where our rules are slightly different. we have seen times during the crisis in the fourth whe there t breakage of trades in themarket trades, that there were not in the nyse traded market. at the time no one felt that the separate rules exacerbated the

problem. it's just that there were more breaks in the electronic market. there were tens of thousands of trades taken off the tape in the fourth quarter of 2008. >> my time is expired. the gentleman from new jersey. >> and as is often the case, i will follow up where the chairman was, perhaps, going on that. so, is this something -- from what you're saying there, is this a situation, then, that, thinking back, if you had this hearing a while ago, that we just could not have seen coming? >> i think it's hard to say that we could have seen this coming. we have a set of rules in place which governs the respect of different markets and when they're quoting and when they're not quoting. and a whole set of procedures around that, that we believe have worked very well up until this point. i do believe they continue to work very well. as a matter of fact, mr. leibovitz operates -- as well as the new york floor. they were engaged in the same

electronic trading that we were on thursday. and participating with us. so generally i think that rule set works extraordinarily well. we did hit a confluence of events where clearly we need to do something to address. i think what chairman schaprio suggested which we agree with fully is we need the coordinated stock by stock circuit breaker. >> just to go down that road a little bit, mr. leibovitz, maybe you were touching on it if i was hearing you as you were saying it. as far as those issues that are out there, confluence of issues, was one of those confluences -- one of those issues that were in the confluence what was going on over in europe and the fact -- the whole greek situation? mr. noll i think you said u.s. was paying attention to that. was part of that the fact that the value of the euro currency was going down, other foreign currencies was going up and the banks were having a difficult time with their carry trade in that respect, and in order to

deal with that they had to do something which i guess is to unload equities? was that an element of what was coming out of europe at that period of time? >> i don't think that we have any visibility into that. we haven't heard that. i think we're really focusing on our market and leaving the sec and cftc to see the across the market effects. >> does anybody else have a thought on that as far as what the influence of that as being one of the confluences of their impact of their trades as well? >> we have seen no evidence of that. and as larry said, we're very focused on what happened on our individual markets. >> to the extent you're focused on what's happened in individual markets, the chairman was saying before that here four days later we're still trying to get all the data collected from all the 40 or 50, however many there are right now, data sources. there is no central repository for all those trades. and that's why she's going out to get them as she is, i guess. is that a problem? is that something that we should have seen in the past and tried to address? >> i think the chairman and i

think other people in the marketplace have recognized that that was a potential problem before. as a matter of fact, there have been ongoing discussions with finra and sec and all the markets about consolidating an audit trail that predate the may 6th event. it's unfortunate we have not gotten to that point so far in the marketplace. >> is there something that holds that up? is there somebody opposed to that? >> as far as i know no one is opposed to it. i think it's a matter of applying the process and getting it done? >> who's responsible for that? >> it's a marketwide issue. multiple regulators. i think there may even be, i'm not absolutely positive about this, but i think there may be some congressional authority needed for the sec in order to do so. >> to do something like that. to the point as far as what authority the sec has now and what they may need in the future, one of the points has already been addressed. you raised this to some extent as far as the commonality of the market -- is there a difference

as far as the folks who are at the table right now, the major participants in it, and some of the smaller, alternative platforms as far as whether this should be uniform across them all, and if the answer is no, why shouldn't it be? and if the answer is yes, would that impact upon the slightly different model ts that some of the smaller market participants would have? >> the answer is there should be one standard across all platforms whether it's an exchange, an ats, any different venue. and there will be. >> we didn't have any of them here. if they were sitting here what would their argument be why it shouldn't be that case? >> i don't believe anyone would argue against a stock by stock circuit breaker at this point. >> i think you're already seeing various bodies come out in favor of it. i think the industry at this point would line up 100% behind it. >> okay. what about the time to implement these changes? as you said, a lot of this has been looked at for a long period

of time. the rule nms took a long time in order to implement -- we're talking here about implements this like this quickly. is there a problem if we move too quickly at this point in time or is this just the right thing to do? >> i think on the market wide circuit breaker issue, i think we can move very quickly on that. i think the chairman will be discussing with us, making rule filings, adopts new market wide circuit breakers relatively shortly. and then we will process those and put them in place very efficaciously. i think as we deal with some of the stock by stock issues, we m technology issues. >> what issues? >> stock by stock circuit breakers. technological problems putting them in place, but those are short dated, not long dated. >> great. >> thank you very much. gentleman from california,

mr. sherman. >> thank you. we're talking here about how to make a high frequency trading safer. the question is, dut it fulfill any social utility at all. in the old days, somebody would want to sell a stock for $10 and somebody else might want to buy it for $10.05 or i remember when they were an 18th of a point. and there was a settlement between and maybe one or the other of those two real investors got a slightly better deal. now there's somebody with a fast computer who can come in and scoop up that 5 cents to make sure neither of the real investors benefits from it. i realize wall street makes a lot of money from all this high

frequency trading. but the question is, does it help provide liquidity, or in some other way allocate capital? now, the events of last week seem to indicate that high frequency trading doesn't provide liquidity, it uses up liquidity, demands liquidity, and there was no liquidity for a few minutes. so i'll start with mr mr. leibovitz. if we didn't have high frequency trading, would this hurt the companies that are doing business and their employees? >> sure. so i'm going to stay away from whether there's a social value to this. what i'll say is market makers have existed for hundreds of years, so it's not correct to say in the past if somebody sold at $10 and wanted to buy at

$10.05, they matched up. the difference is they were physical people whether they were on the floor of the market exchange or in nanasdaq, but there's always been a middle man. they match up buyers and sellers. sometimes they play a role, sometimes they put people together. sometimes when the buy eperson wants to sell, the buyer isn't there. i think as technology caused trading to speed up, people were unable to keep up with that in a market making capacity. that's why they have been replaced by market makers who are high frequency traders, but they have obligations to the market. they have to have a quoting requirement, they have to provide a certain amount of liquidity. they operate in a very structured environment. >> what percentage of the high freak waebs trading is done by these old term, market makers. >> i would, first in the case of dmms, they provide 10% of the

liquidity to the new york stock exchange market. there's another market maker in that variety that is another 10%. >> if i can interresult because i only have five minutes, i'm not asking what percentage of liquidity is provided by these individuals. i'm asking what perisn't of the high frequency trading. it's been reported that two thirds of the trades in the united states are high frequency traders and you're sdriedb what would seem to be a small percentage of that trade. >> i would estimate 40% to 45% of the market is high frequency market makers of some form. dmms, sops, or some other thing. the balance you make into the two thirds is rhythmic trading. that could be a big mutual fund decided to sell 10,000 shares

that looks like a high frequency trade. that's why we hardly endorse the reporting scheme where we can get trance paerns into what the high frequency trades are doing. >> most of us when we think of terms of high frequency trading are looking at those buying and selling the same stock in a short window, not somebody who is selling and selling and selling, which as you say could be an investor trying unload a stock. do you have a comment on this 1234. >> yes, i thing when you look at not withstanding last thursday's events, over the years, you have seen an increasing tightening of the bid offer spread and an increasing liquidity at those spreads. as we look at the issue, and we agree with mr. leibovitz and chairman shapiro that we have to understand what hike frequency

traders are doing. i think the evidence is they provide a real val ow in the sense they provide deep markets, they have reduced costs for all participants to access the markets. i do think, however, we also need to look at how they interact in the market on an ongoing basis. they have provided real liquidity. >> well, obviously, last week they were the cause of the absence of liquidity, but i believe my time has expired. you can respond further for the record. >> i would say that we're not sure that is in fact the case. i think it's an overstatement to say that we know it was high frequency traders. that's an issue we're continuing to look at at this point. it appears to be a very broad market sell-off with many market participants, not just high frequency traders involved. >> thank you, the gentleman from alabama. >> i know history teaches there

have been dramatic falls in the market even before we had electronic trading so i don't think the culprit is high frequency trading. i guess that's part of the debate. you know, one thing we can never, i think we can never prevent is negative market development or economic developments from affecting the market. so i'm just trying to think of, you have shifts and sentiments, so that's going to move the market because changes in volatility. so what you really want is the market to reflect all those things and to do it, i guess, as efficiently as possible. i'm very encouraged by what i hear today and what happened yesterday in that i think that there's been maybe as a result

of last thursday and the concern that i think everyone had before is that we're coming into an agreement that there ought to be some sort of marketwide circuit breakers. do you all agree on that? >> absolutely. >> and coordinated maybe stock by stock circuit breakers. >> we agree with that. >> mr. duffy? >> yeah, we agree with that. we see no issue with that. again, this is not pertaining to the group. we don't trade individual stock. >> right, okay. what about -- if you trade an option or you trade an etf or something, you trade options. the moonies, do you trade those? >> we trade futures with options on futures. >> okay. >> we don't trade to spider. >> all right.

>> let me ask all of you, you know, we have kind of gone from a highly structured duopoly or at least with stock trading to a much more fragmented system. how would you advise the regulators to meet the challenges of addressing market integrity and price discovery without hurting competition? >> i'll be happy to start even though i thing this is more your valley. i'll jump in. you need to have the same set of standards and protocols across the multiple markets. it's as simple as that. you can't have one set of rules at the nysc and then at nasdaq and other places. it's a recipe for disaster. no one has been able to explain how accenture went from $4 to a

penny. you have to explain that. you have to same the same protocol across the marketplaces. >> mr. leave wits or mr. noll. >> i think it's clear the complexity of our market represents a challenge for regulators. no doubt urblt it. and i think the s.e.c. is trying to respond to the challenge. the concept release they issued to review variousoose spkts whether it's atss, sponsored access, or all well timed and they need the resources and need to be nimble enough to get through that. the challenge is that we're in an environment that is relatively complex, and small changes have unintended consequences. for example, just to say, let's ban high frequency trading, i think we would be stunned with the consequences. even small changes have big effects we may not see. and they need to be careful while at the same time moving quickly when we see a problem where we all agree like market

wide circuit breakers on individual stocks. that's an easy one, a no-brainer. >> i agree, and i think some of the things we talked about already indicate we're moving in that direction, both on the market wide circuit breakers, changing the circuit breakers on the entire audit as well as the functionality of the s.e.c. it's a complex market. i think the chairman are fully aware of how complex it is and have the tools and intellectual capital to deal with that, and we're here to assist them to do that. >> mr. leave awawits, what you said, i agree with it. the markets and exchanges handle volatility quite well in the financial crisis in 2008. they didn't -- they didn't react quite as well to the volatility, you know, last thursday. what do you think, what do you

see is the difference? >> it's interesting because we discussed this at considerable lejt. i think it had to happen with things happening at a certain part of the day. a lot of the news came out overnight. this is something that happened during the day, and it was almost set up. the market was in a jittery situation. the vix was rising. there was nervousness about europe, and there was a speculation to the day and the announcement of what was going on at greece. that happened at a bad time. had that come out at night, we woobt have seen the swing we saw that day. >> let me ask this question. the circuit breaker concept. right now, we're in a situation where we have computers who are

using very difficult mathematical formulas to trade millions of shares of stock in milliseconds. and our solution to this, as i hear you say, and chairman shapiro and ginsler, is an institute stock-by-stock circuit breakers marketwide. in a centralized way. and i saw a movie a couple weeks ago. a fun movie if you want to see it, it's called "eagle eye." i don't know if you saw that, but if you get a chance, it's interesting. it points out what happens in concentrating and putting so much control into a computer. what i want to ask each of you

because apparently as i hear your testimony, particularly the new york stock exchange have said that you have circuit breakers. the complaint was that maybe that moved too slow. so as we debate this issue of circuit breakers, i want each of you to tell us, are there any downsides? is there anything we have to fear here? is there an element of freedom that takes out of the free enterprise system the freedom of the market exchange? let us be very clear, is there anything we have to fear if this is the solution of putting this much control in the stock-by-stock marketwide one central location of a circuit breaker? >> well, if i could address that, in two parts, mr mr. chairman. i think the issue for us is that technology in and of itself is a

tool. it's a tool used by market participants, and i think used very effectively by market participants. we view the functioning of our market and its continuous operation as one of the envies of the world, and generally bethe exception of that 17-minute period on may 6th, it functions extraordinarily well, and i would argue even during that period of time, our technology functioned well, but the market participants on our market experienced an absence of liquidi liquidity, so what we're really concerned about is when our markets become dysfunctional. what the chairman has proposed and what we have discussed as exchanges is not putting centralized control over the marketwide stock by stock circuit breakers, but adopting similar rules so we have the same rule for when a stock get halted. we'll continue to operate our own technology separate from one another with the oversight of

the s.e.c. i don't think we're talking about a central computer that is going to control this. we're talking about a coordination of our rule sets with one another when a market wide stock by stock call should be called. >> i agree that information is transmitted to the market faster and faster. when events happen, it just ripples through the market. it's on cnbc within seconds. and the fact that trading is speeding up every day means that the market reacts faster. i think all this is really designed to do is cause a quick pause to make sure everybody understands what is happening and assembles a liquidity so we koe don't hit a down pocket like before. we're in the free market. we compete with each other and compete with each other aggressively, yet we can agree on simple concepts like the circuit breakers that make the market better. in the end, if we don't have a market investors believe in, if

they feel it's a rigged game, they're not going to invest their money. that's going to harm capital formation, retirement, all these things. >> i think you asked a very interesting question, which is what about technology? we continue to build it, will it eventually consume us? which is what i heard your question to be, and what are we doing to make sure events like this don't happen again. there's more to it than just circuit breakers. there's preexecution, multiple venues, but then you get into what is the moe important in my experience. you have to have a experienced risk management team, a deep regulatory department to make sure this is done legit mely and your technology team can work with your risk management parameters to mock sure the computers don't go out of control. >> that's my point, i know my time is up, but that is a very serious point because if we're going to coordinate this, there

has to be some mechanism that triggers it. and i think that that was the failure in the new york stock exchange. you have a circuit breaker there. and apparently it did not work because of something with the trigger. is that correction? >> no, that's not correct, actually. our circle breakers str s trigg well. the problem is in the current u.s. market regulations, the other venues won't have to obey us. it worked well for our market and other markets that observed our circuit breaker. however, it clearly showed a failing in our market if another market doesn't have to follow that circuit breaker. that's why we have agreed on marketwide circuit breakers but this doesn't end the conversation. we have to continually look at ways to safe market the market and make sure technology is doing what isit's supposed to be doing. >> my final point is if we go

with this circuit breaker market wide stock by stock from each of you very quickly, is there any downside? is there anything we have to worry about if we go this way? >> i think very quickly on that point, i think the only downside is the true price discovery is not being found. >> i'm sorry. >> the true price discovery could be interfered with. it's important for us as we design the market wide stock by stock circuit breakers that we want to make sure that buyers and sellers are able to find each other in an efficient and fair fashion but that we aren't otherwise closing off price discovery inadvertently because that will reeffect itself when the stock starts to trade again and you'll have a cascading effect as opposed to true price discovery. >> i do believe that mr. noll is correct, but i also believe price discovery is done

throughout the trading session, not a microsecond, so you have to figure out the price and let everybody participate. where hear what he's saying but i don't completely agree with that. >> all right. >> i think it's incumbent upon us to build the circuit breakers in a way to help the market function properly. go through the auction process, and give the marked a chance to pause and establish the right price. if we don't do a good job of it, we'll be in the same place we were. we need to work together to make that change work properly. >> thank you very much. thank you for my indulgence. >> thank you, mr. chairman. mr. duffy, in your testimony and you have talked about the stock price logic, so can you also highlight a number of risk management controls used at sme in addition to the circuit breaker rules.

specifically, could you walk through the difference between the circuit breakers and the stop price logic employed at the cme. >> circuit breakers were coordinated amongst the security changes at a 10%, 20%, 30% circuit breaker depending on what time of day it happens. up to 1:30, it's 10%, then it goes to 20%, if it goes to 30%, the market is closed all day. what the stop functionality we have deployed at cme group is if our market goes up or down in a roughly if you used the equivalent price of the s&p index, a half of one%. if you can't find the liuidity to fill that, it stops five seconds. it allows the market to catch its breath. if it cannot seek liquidity in that five-minute period, it's

going to halt again. that's the way it works. and we have incircuit breakers also in coordination. >> what happens on thursday, then, that stabilized the market activity? >> there's no question, congresswoman, we brought these charges for a purpose, because it makes sense. the futures market stop logic kicked in. people had an opportunity to assemble liquidity and the market started to go the other direction and we led that direction so i think it works flawlessly. >> you say the functionality is not available in the securities market. is it just because they don't use it? >> to be perfectly honest with you, this is patented technology by cme group, and we would be happy without a cost to give it to the securities exchanges if it made the whole system better. >> it could work for any individual stocks? >> we do believe it could. >> i would like to ask the other

gentleman, mr. noll and mr mr. leibovitz, would you consider using this? do you think this would be available? >> i think we would consider all options. right now, we have a circuit breaker, the functionality of what works. the problem is it's not market wide. they're very similar, hopefully not patent infringing in terms of if the stock moves a certain amount in a certain amount of time, and that's gauged by the liquidity of the stock. it triggers a slow quote and we take a time to attract liquid y liquidity, so it's similar to what the cme does except theirs is fully automatted, as i understand it, just triggered by time. ours involved dmm involvement to unwind it. each exchange, we'll figure out

a way, we'll discuss the rules for implementing, but in the end, the stock circuit breakers will be very similar to the stop loss pauses mr. duffy has explained. >> except that it's not now. it didn't work on thursday. >> i disagree. so they actually worked in the new york stock exchange marked. the failure is not all of the markets were obeying them. what we need to do is implement them, whether we implement his version or a slightly different version because securities trade differently, we'll figure that out. this is really, as mr. noll said, this is an implementation from a technology view. >> in other words, for it to work, it has to be implemented across all market venues? >> what would be most likely to happen is the listing value, our

exchange, in nasdaq, nasdaq will implement the stock loss trigger and the other markets will have to aboy it as i understand it. >> i agree. i think that's where we'll end up. >> mr. noll, i didn't hear you? >> i think that's where we'll end up, we'll determine when a stock should be halted and all of the listing venues will obey that stock. >> how long do you think this will take to work that out? >> i think the rule set where at least an understanding of if functionality will take place over the next couple days. this is the outside framework in which to operate the market wide stock by stock framework in. the implementation is subject to all of us revisiting our technology and revisiting how long it will take to implement it. >> i think we'll all have answers. as the new york stock exchange, we would throw out using our system and having everybody obey that. the circuit breakers that are now in place, but we recognize that is not amenable to most

market participants. >> thank you. >> the gentleman from indiana. >> thank you, mr. chairman. question for mr. duffy, mr mr. duffy, even though no one had answers on may 6th, cme took the unusual step of commenting on individual participation in its markets when it denied citigroup may have executed an irregular trade. first, how was cme able in that frenetic day to absolve citigroup of any involvement and how do you resolve the statement with its policy of not commenting on individual market participants. >> that's a great question. it was a very difficult situation for us at the time because you have to realize we're working on realtime with the situation happening with the rumors that somebody from citigroup entered in a $16 million notional transaction.

we knew because of the systems we have in place that that was cat goricly false. we could put ring fence citibank's inventory they did on a real time basis within moments. we traditionally would not ever make statements like that because of the situations the banks have been in. we thought it was the prudent thing to do on citi's behalf and the taxpayers. it was the right thing to do to make the statement to make sure the rumor went away. >> mr. leibovitz, although the cause of the may 6th volatility spike has yet to be determined, do preliminary investigations indicate flaws and can regulatory improvements at the different levels prevent what could be a technological glitch. >> we have recognized that the circuit breakers are on a stock

by stock basis is a failure among our markets to work together properly and create the right market environment. i think the s.e.c. concept review which they're doing right now will help identify other areas we may feel regulation is lacking. maybe there's not enough surveillance. many of us believe centralized surveillance is critical in this market. i feel sorry for the s.e.c. staff that's had to assemble from 47 venues and they have done amazing work in doing t but we need to not be in this simpuation going forward. we're committed and i know that mr. noll's group is committed to working with the s.e.c. to make that happen. >> and mr. noll, could you please give us a run down of the decision making process that resulted in the cancellation of almost 3,000 stockts. >> it's important to note this was a multiexchange decision. so all the marketplaces

participated in the decision to break the trades that occurred in that period of time that occurred between 2:40 and 3:00. it was all markets in su consultation with one another. and we were governed by two things that influenced the decision making process. the first was when in fact did the markets become disorderly as opposed to orderly. if you look at some of the time of sales and trades that occurred in that time, their fall, even though it was drastic and fast, was what we would call orderly. they were walking down step by step in the way they were supposed to happen. it was only at the very bottom where we saw very anomalous prints. we were concerned about drawing a line where we could address the anomalous prints and not the order by order orderly trading that was going on, and we were cognizant of the moral hazard problem, which is people should

bear the consequences of their action. we were sure below the line, we were capturing the bulk of the anomalous trades, but people's behavior, they bear some consequence for that. whether they won or lost in that time, they should bear a consequence. we're cognizant not to reward people for bad behavior but save people from anomalous failure of the markets at that time. >> thank you, sir. mr. chairman, i yield back. >>ientalman from indiana. >> i'm sorry, illinois. >> close. mr. duffy, on page 1 of your testimony, you state that, quote, the most significant equity interest futures contract traded on the cme exchanges is the e-mini futures contract.

>> yes, sir. >> and also in 2009, the average daily volume for the e-mini s&p futures contract was $2,275,000 and you continue that on page 2. you discuss the trading period from 1:00 and 2:00 central standard time. your analysis of the trading activity indicates that the e-mini s&p futures contract was nat the triggering event. i heard reports than the e-mini contract led the sell-off of the dow. can you walk us through what happens with the e mini and your thoughts on what may have been the true triggering of that? >> i think we have heard a lot about different events in the marketplace leading up to the time coming into question.

the volume in the e mini was heavy. this is not usual. e-mini is about four times the amount of the spider contract. at that particular time, we traded about ten times the volume. so we traded the most highly liquid product. as i said earlier, futures contracts by design, they're indicators of people's potential view point on what they think is going to happen so they're traditionally leaders up and down the marketplace, and again, our markets operating within all the protocols of cme's systems so we didn't have any fat finger issue. we were confident of that. the market was moving rapidly, at the same tie, there were a lot of macroeconomic events happening. it was unusual activity. it happens and happened quickly, but we didn't bust trades. we looked at some of the algorithimate traders in

question here. they were more liquidity providers at the time in question. they were not aggressor s or taking the market. they were leading the market because of the nature of the product, sir. and then as you can see, our stop logic worked, and the list of stocks kept going down for whatever reason, that's still yet to be explained why they went to the prices they did. we did not trigger which would have been a stop trickt for the c cme would have been a 20% circuit breaker, and we were roughly about 9.5% at the lowest point in the s&p contract, sir. >> let me ask you an unrelated question because something obviously, well, maybe not obviously, but apparently something spooked the market. anything to do with the problem in greece? or worldwide activity, or

inaboi inability what is going on with regard to the euro? do you see any connection or is it just coincidence? >> i have seen a lot of high volatility, sir, especially coming into that day. all those events were on the front page. i'm sure they had a contributing factor to the market conditions that led to the precipitous downfall, and we saw a couple stocks trading at a penny that were $40 stocks. so one was probably wondering what was going on in the marketplace. >> mr. noll, would you like to comment on the last question could you turn on your mike and pull it closer to you? >> on the volatility in the marketplace at that time? >> yes t doesn't have to be a precise answer. >> i don't think we have a precise answer, and i'm not sure if we'll ever get a precise answer as to the notcher of the root cause of the uncertainty in the marketplace. what i think is very clear is we

saw an increasing amount of volatility on the days leading up to may 6th. we saw a spike in all the measurements of volatility. the day of may 6 was already a volatile day before the events here happened. it was already a severe down day. it was also the third day in a row of down equity markets. i think when we hit these air pockets or this confluence of events, if i can call it that, we were in a position where there was a massive downdraft in the market play, when we recovered from, but nonetheless, i think it's important for us to address the causes and to prevent that from happening going forward.leibovitz. >> i think the gentleman to my left has hit it right. it was a spook market, i think you even used that term. the markets became choppy. it's likely some news out of europe may have gotten people selling, but the behavior you saw, selling stocks down to a

penny, that not permissible behavior. that's a market structure failure that we have incumbent upon us to correct. on the other hand, markets are allowed to sell off in a resinable way, so if investors were afraid of greece and the euro and anything else that was going on, they should be selling the market off. what we're really addressing is is it happening in a reasonable and orderly way? are investors being disadvantaged by events trancepiring on the exchange? it would be hard to justify to a retail investor that he sold a stock at a penny. that has to be addressed. the fact that something triggers a sell-off, if we can't find an actual cause, meaning a trader, and there's so many rumors and that's part of we live with that every day in our market. the rumors gets translated so quickly that we have to deal with it. >> could i ask one more question. thank you. your answers -- your answers take into consideration or are

based on the fact there wasn't anybody out there who, quote, made a killing that day, is that correct? there's no bad person out there or somebody you can say look at what he or she or they did as a group that caused this? >> i mean, i think the investigations and the looking at the evidence will take place over the next couple days and weeks until all the determinations are made of everyone's behavior, whether it was good or bad or within the rules or not within the rules. as of dood in the nasdaq market, we have not seen anything that would suggest to us anybody was behaving in an inappropriate fashion. >> i would quite the option of making a quikilling. if they followed the market down, chances are they got hurt badly. the market snap back and they sold way below where the market ended up. while retail investors and others volfollows them down,

they didn't make a killing. >> congressman? >> i agree with both of these gentlemen. i have not heard anything extraordinary. then again, it's a sensitive topic and we'll let our regulatory departments address that. >> thank you. >> thank you, sir. now we'll hear from the gentleman from new jersey. >> just with one last question, and i appreciate all the time here. your on board with the circuit breaker idea, and spent a lot of time on it. and mr. duffy you mentioned what your system is as far as the 20%. >> our system on the circuit breaker, it's the way it works today, it goes down roughly a half percentage of what the s&p contract is today. if it doesn't have the liquidity to fill the number of contracts buy or sell, it will halt for five seconds and try to attract that liquidity.

if it doesn't do it, it will halt another five seconds to try to atrath the liquidity. >> when you're meeting with the chairmen in the next few days come up with uniformity on the issue, is there a lower level that you'll say this is not a realistic level? there are rumors that say you're looking of bands of 2% or so that would be too restrictive for individual stocks and what have you. what is the appropriate level? >> i think we're still engaged in that effort of determining the appropriate level. i happen to share your concern that we not draw the bands too tightly. >> what is that? >> i think 2% is too tight. i think what we saw on thursday is the lrp functionality going off at 2% levels which caused dislocations in the marketplace. perhaps unintentionally, but none the less, caused dislocations while other markets

provided liquidity at that level. as larry had suggested earlier, we need to agree on what the right, appropriate levels are. i don't think 2% is the right level. we tend to believe it should be 10%. i think it's still a moving target for all of us. >> i would agree with mr. noll 100%. we use for our lrp is relatively tight bands. proctor & gamble is about 2%. the intent is to continue trading and get it going relatively quickly. for this, we want to use broader bands because we want it marketwide. >> i want to make one market, the 10%, 20%, and 30% which the gentlemen are referring to can be narrowed, but if you narrow those percentages, what is more important then is to narrow the timeframe that the market is closed because they will be seeking liquidity at other venues. if you narrow the time to 5:15,

and whatever you want to come up with, you can't be closed for an hour or all day. you narrow those time windows and narrow the bantdz and it will work out for everybody. >> i think it's a great point on a stock by stock basis. we're talking about a couple minutes at most. on a market wide basis as we narrow the market bands, we narrow the timeframe for the close so it's not as long as in the past. >> you could bring in overseas trade. >> exactly. >> thank you, mr. garrett. i want to thank each of you, mr. leibovitz, mr. noll, mr. duffy, and also chairman shapiro and chairman ginsler for your excellent, superb, and well-presented witnesses and your testimony today on this very critical issue. as we move to make sure we maintain the strongest investor confidence in our financial markets and in our investor trading.

thank you again very, very much for coming before our committee and helping us with this. the chair notes that some members they have additional questions for the panel which they may wish to submit in writing. the hearing will remain open for 30 day for members submit written questions to the witnesses and to place their responses in the record. before we adjourn, the following will be made part of the record of the hearing. the written statements of bart children, commodities trading commission, it's so ordered the panel is dismissed and this hearing is adjourned.

john garver, george attack university, and ken, a fellow here at brookings.

-- at georgia tech university that is garver. let's begin with north korea, and jack will talk first about the issue in toto. and it jonathan will talk about how well the u.s. and china are working together on that subject. >> thank you very much. i did a program last week at brookings, and was remarking how there really appreciated the opportunity to go last in a two- day conference. i have tried to figure out what is going worse, that is following im. by my calculation we have lost nearly half the audience. that means we are about 18 the

drop aw of jim -- 1/8 the draw. is a pleasure to be on this panel. i'm going to start off by stealing jonathan's thunder. if you have not read his latest paper, it is the north korea nuclear weapons out of london, an implication for future policy. it is a terrific overview, and suggestions on what to do. i don't know if you will speak about that. i found it absolutely worthwhile. i commend you all to take a look at it. the first thing i would like to do is focus on what the u.s. concern is about north korea. it helps to answer the question. throughout my dealings with

north korea that the no would tell people even as we dealt with the developments of their nuclear weapons program, is i do not wake up in the middle of the night thinking that north korea is just on the verge of [unintelligible] one of their missiles and therefore san francisco is soon to disappear. it is the question of proliferation. we have to be most concerned about what the north koreans are doing and why. and what they have, and the potential for it to become < accountable on their part. richard has asked a question i will not reveal now. it is a pertinent question. the answer has to do a lot with this particular issue.

so, we have dealt with the north korean problem for a number of years. we have had fleeting glimpses of success in the agreed framework of 1994 that froze the issue for some time, but not completely. it had flaws with respect to the nuclear non-proliferation treaty. it postponed the reckoning of what north korea was supposed to do to a later date, which we never got to. so, rather than suggesting the six-party talks of a panacea, i would like to take a different tack. we need to stabilize the size of the north korean problem

immediately. minimize future risks. when we have that opportunity, we then should remove as quickly as possible the material they have. it suggests that once we get back to active negotiations with them, we ought to be doing something different. something we have not in the past. we should negotiate the end game the first. control the material, dispose of it, then clean up the game afterwards. the piecemeal approach we have seen for several years it did not work. it opened the door in periods of time for north korea to expand a limited amount of fissile material. we started behind with north

korea having possession of some small amount of fissile material, in the range of one to two weapons' worth of plutonium. that opened up dramatically. in 2003 the second crisis got under way. it was furthered in 2005. each time they expanded their possession of materials to the point where the program matured in october 2006 to their having detonated the first nuclear device. it was followed this past year towards the end of may almost one year ago were they detonated a second device. what has happened in the last 18

months, has been an unfortunate relaxation of concern. we have settled into the maintenance, the management of north korea's nuclear weapons program. we have not been actively seeking to get rid of the stuff. there are many reasons, not all the problem of the obama administration. there are many things on track. we're not moving in an effort now to get rid of this material. i suggest it is the main problem. i don't want to spend too much time on that. compounding that is this incident. the secretary indicated there was an indication of connection between the movement and

incident. i suggest there is a domestic political connection that we can explore offline. it has suggested we cannot be indifferent. the indifference puts us back into the management. we're postponing active resolution. will we do in the meantime? lacking the active resolution, then must make sure that we don't end up with the inadvertent movement of the fissile material from north korea elsewhere. one of the things that probably needs to be done is the emphasis on the consequences should that

occur. when i was in government i told the north koreans directly in 2002, 2003, that proliferation was the red line the u.s. could not tolerate. 10 years before that the reprocessing was supposed to have been the red line according to the former secretary of defense was prepared to use military force on. the red line has been passed a couple of times recently. i was convinced in the post-9/11 environment that the u.s. would not tolerate the transfer of material to a third party. we saw clearly that the north koreans did that. we found out in september 2007

as the israeli air force bomb, the syrian nuclear facility, that the north koreans had been involved. the problem was, if you look back, there was no consequence. the u.s. did not do anything to reinforce that this was not acceptable behavior. we have to make sure it even in this time of an activity that the message goes back to the north koreans that proliferation does matter to this administration. that once we began the active resumption of the six-party talks, one of the agenda items must come back onto the plate --

a resolution of what happened with syria. it should be done in a way to send a signal that we will not tolerate the proliferation of fissile or technical information there. we have missed the boat a couple of times. once was in january 2003 as the north koreans were breaking out of the agreed framework. one of the things they did was to withdraw from the npt. i find this somewhat amusing, the manner in which they did it. and the 1993 time, they announced their withdrawal from the npt. they're supposed to give 90 days

notification. they gave notification, 89 days and some hours before they suspended their withdrawal based upon progress being made. in january 2003 after a confrontation with the u.s. over concern about highly enriched uranium, the north koreans that we will withdraw from the npt. by the way, that becomes effective in about 10 hours. we're combining the notification we gave you nine years ago to" we're doing today. that sense to me -- sends to me -- the u.s. response was not to formally protest, and that was unfortunate. one of the things we need to take advantage of it is fully

understanding north korean motivations. i commend the reading of this paper on this. he does a wonderful job of tracing the development of the north koreans'nuclear program, and gives us a much better understanding of where they are and have come from and are likely to go. for the north koreans, there has been an added factor that most of you are aware of. the events of the last nearly two years. in august 2008 you are aware of a stroke by kim jong-il. at the end of the bush administration and beginning of the obama administration, the inability to come to conclusion

for about a verification regime. what was perceived by the obama administration to be provocative actions. preparing for and launching a long-range missile on april 5, 2009, followed short weeks later by their second nuclear device. it suggests the north koreans then and now are in a position where they cannot show weakness. nationalism is the priority. they are in no position to compromise. as we look at the ground and solicit assistance from others, there are couple of things. the situation is not the same as it was towards the last active phase of the six-party talks.

the situation in china with regard to their own national security interests i don't think has changed much. accept their full understanding of what is going on in the north korea today. -- except that. the regime itself is under stress. their attempts and a belated manner to find a route to succession that has always been understood as their preferred manner from transitioning from their leader to a later leader has been extraordinary late coming. i would go into those details other than to say that the north koreans, as they are positioning themselves for the next couple of years with 2012 an important date for number of reasons, they

are now in a position to walk back on a voluntary basis their nuclear weapons program. where does that leave us? to me it suggests we ought to take a vantage of the vulnerabilities of the north korean regime, of the things they hold dearest in terms of the regime's survival, successful transfer of power, and the aiming towards 2012. what happens if we resolve the incident to a satisfactory conclusion to allow the six- party talks to be resumed, and what is the probability the north koreans will in the near- term give up their nuclear weapons? in my opinion, very little.

the situation does not now currently ripe for north korea to move forward on its own initiative. so what is incumbent on the u.s. and its partners to help shape the environment. i want to spend one sentence about what north korea is doing in its attempt to shape the environment. kim jong-il has just returned from his trip to china. we don't have full reports. but one of the things we have seen come of that is the suggestion that the north koreans said they will help with the chinese to create a more favorable condition in which they can then participate in a six-party talks. what are they?

from the recent past when the other would like to have a peaceful regime ballot with the u.s., the sanctions withdrawn. with their relationship with the chinese they are attempting to shape the environment to their advantage. what we need to do is to move rapidly to pick up the momentum i think has been lost. i will end on this particular point. surely after the second nuclear test in may last year, the following month, there was a consensus. it resulted in the development of the un security council resolution for which the chinese were part of the authorship of that. even knowing their national security interests, not including bringing down the north korean government, the chinese, in my opinion, started

off on much of the right foot in the implementation, at least verbally, of 1874. one of the things the obama administration did to its credit was to create a sanctions coordinator who won two locations visited beijing among several countries and kept the focus on the actual implementation and effectiveness of 1874. something i would remind you of with this resolution that is different from other resolutions and sanctions in general, while directed that north korea, the responsibility was universal on each member of the un. they were required to do a number of things. to identify, search, to report, to dispose of. on a number of occasions we have

seen, this was successfully done. faugh in my opinion there was a very small window of opportunity last summer when the north koreans, but they certainly did not believe the sanctions were adversely affecting them daily, they did not like the path or directions of where it was headed. for a moment in time it created a charm offensive by the north koreans to improved relationship with south koreans, the u.s., and to try their best to get out from under the future application of the sanctions. this is an important part of what we need to be doing. it is a vulnerability that -- and i'm not going into much in terms of the chinese rule. there is a positive role to be played based on their own commitments there.

if we could get back to the moment of time, which hopefully is not asking too much, giving our full understanding of their interests, we might have a chance at beginning to shape the environment so that the north koreans understand they're headed in the wrong direction. once we do that, we will begin to open the potential for resolution of their nuclear weapons program. >> thanks very much veryjack for laying the foundation. we now turn to jonathan. >> thank you, richard. these are my own views. i am an employee of the u.s. government. fortunately, i can express my own opinions. jack has tried to set some of the larger context for some

questions. there is no need for me to go over that same ground. my focus will be more on chinese policy calculations towards north korea, and helen turn these could advance warning of it -- how in turn, they could inhibit or dance u.s./china collaboration and how those could restrain or reverse the weapons development of north korea. i have been asked to place this in context. this is part of the new u.s./china agenda. it has a global dimension. it has a local and historical dimension. especially for the chinese. we are meeting in the immediate aftermath of kim jong-il's visit

to china -- this was his fifth visit since 2000. of course, it was his first visit to china since north korea conducted its initial test in 2006. his visit now coincides with a number of urgent issues. it is more than the question of north korean nuclear issue, but of north korea itself. where it perceives as a political and military system. what the dangers and risks are of this extraordinary, and very self-referential entity. it occurs in the aftermath of the investigation. we will await word on findings. we also have kim jong-il's and

certain health, the leadership succession, the key to economic needs, and not least it's determined pursuit of the nuclear weapons capability -- ones reinforced and not undermined by its most recent statements, especially on april 21. if i can give their quotation " the nuclear task, by this at the state of nuclear and balance in northeast asia where nuclear weapons and umbrellas were packed, and where only the dorj remained as a nuclear backings and was brought to an end. the nuclear deterrence provided by the position, the danger of outbreak of war has noticeably been reduced.

this is precisely the effort made on the crest is to remove the nuclear states not through words only, but by deterring the u.s. nuclear weapons with our nuclear-weapons." there are other statements in this which i commend to your attention. i suspect china looks at this question in a much longer historical context. its history with the regime over the decades, the fact that china helped frankly to save, rescue the north koreans during the korean war, that china has been a protector, not consistently, but over time. when meets with

meets with