losses reach a certain level. paul kanjorski on your screen right now chairing the subcommittee on capital markets. >> we'll examine the frightening afternoon of may 6th, one of the most volatile trading days in histo history. within minutes, stock market indices dropped precipitously, erasing more than $1 trillion in capitalization before recovery. while we may not yet have had all of the facts about these events, we must quickly analyze what happened and embrace reforms in order to restore market integrity and promote

investor confidence. going back to 2003, questions surrounding market structure have received considerable attention in this subcommittee. many of the issues we have previously explored remain just as relevant today, especially the longstanding debates of man versus machine and price versus speed. these prior hearings have also taught me that our regulators must remain nimble by continuing to adapt market structure roles to respond to an ever-evolving environment. technological advances have dramatically altered the way wall street operates. such progress is natural for the united states to continue to lead the world's capital markets, we must continue to encourage innovation. but change also can have its downsides. many have cited the role of computers in contributing to and exacerbating last week's

gyrations. in recent years, high frequency trading has exploded. barely a blip two decades ago when technology constraints and growth last crushed. it auto mated traders. today move in milli seconds and make up as much as two-thirds of daily trading volume. their decisions to trade or not to trade can produce real consequences. we, too, have moved from a model of two major trading centers to an electronic network with dozens of marketplaces for trading equities, creating new headaches for regulators. the ascendancy of computerized training and automated exchanges in our capital markets appears to have created a plot that intriguing as 2001 a space odyssey. today, however, is 2010, and we must figure out how to effectively balance artificial

intelligence with human judgment. this hearing will help us to achieve that goal. it can also help us to determine how to -- how to harness technology to create effective audit trails for regulators. somewhere along the way, competition among exchanges, alternative trading systems and others has additionally led to increased fragmentation. as old trading methods have given way to modern techniques, the rules governing our market architecture has lagged behind. we now must better integrate our markets. in this regard, i encourage that 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 required and the most successful outcome would be 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. thk you. >> the gentleman's time has expired. will now hear from the gentleman from california. >> thank you, mr. chairman. volatility leads to perceived risk, received risk leads toercv

higher cost of capital for real businees in n the real america. if we had markets in which all the profits of proof to realts investors, i think that would be appealing to those making real e investment in real american companies.ments in r in contrast, a market in which procter & gamble can drop to 1 cents is not appealing to thoseo who want to provide real capital to real companies. most of the testimony here simply assumes that we're going to let people doing what they'rg doing, unlimited and untaxed, and we're going to patch up the system in the hope that it won't happen again. this is like the reaction if we had the unplanned explosion of nitroglycerin.unanned if that explosion took place in a mining operation or something else socially useful, we wouldri say,ng well, let's have better

regulations so we can get thatr social utility of thet nitroglycerin without having it explode in an unplanned way. butf thihis intricately risky itroglycerin had an unplanned explosion because kids or gamblers were playing with it,s we might instead not say, well, how can we somewhat reduce the how can wee inherently risky activity. we would say why we allow this activity to take place? and so it raises the question o whether high frequency trading serves a social purpose. imagine if, chairman schapiro, imagine that somehow by magic w created a world in which those investing in u.s. stockshichse actually held them for a couple of hours before they sold them.b or went short for a couple of hours before they covered. and let's say that apply to

procter & gamble, or 3m. app how would the employees of procter & gamble or 3m, what ems catastrophe with a face if the stocks of their companies were not subject to high frequencyes trading? w subject would that help those employees and those operating companies, or would there be some cpanies cataclysmic problem of high frequency trading did not apply to those companies do?ataclysm congressman, let me first of ala agreed, the pppurpose of our capital markets is to helpgreehe companies raise capital toapital create jobs, to help our econome grow. and that investors who commit their capital to those markets get to share economically in that growth and development. econom we haveic lots of questions about-equity trading, and it'llf and our capital markets. role it's one reason we exposed manyi of the issues to high frequencys trading -- to >> madam chair, i know you have many questions. have one question and it is mu time.any

what catastrophe would occur tod the employees of procter & gamble if the stock of that of company was not subject to hight for 20 trading? >> i don't know that any t catastrophe would. there are those who arguere tse perhaps on the next panel that high frequency trading atdds significantly liquidity in the marketplace so that one ofwhen e proctor and gamble employs want to sell, it's each of them to de that. >> to what extent do you agree with the view that these high frequency traders are just parasites on the market? you have ase h market in which l investors are buying and marke selling, and then people come i into the market and grab a buy little piece of a profitin forpt itemselves who are not engaged in real investing. >> i guess i can't really answer that question. >> they might be parasites, they might not be.at queson. i will ask you to answer thattey for the record because i'm goinu onto the next question. would a tax of 120 of 1 cent per 1%000 be sufficient to disrupt the business model of those who are engaged in high frequencyigh

trading, so that they -- they tt would substantially diminish tht amount of high frequency the trading? >> i honestly don't know the answer to that question. i would be happync to think an through.t >> i will ask you to think ithi through.through. tey will have the argument that if we don't have the casinos ono our maugin h santreet sod that y will play the casinos in monte u carlo. but ir will say if all of the american market trading american mark stocks were insulated from most of his high frequency trading, m that's for real investors wouldy want to go. where and if over in dubai somebody wants to bet for a millisecondo on what's happening on the u.s. market, at least a it's notma american mrkind, american computers or the american markets put a t risk. red.i believe my time has expired. >> thank you very much. now we'll hear from the i'llleman from alabama. mr. baucus. >> thank you, mr. chairman.

the ful you the steam engine came along and hit a lot of livestock and lot of the farmers thought they probably should do a way withstn the steam engine, it also set fire to some of the fields.enne. but we figured out some preventive measures and we'veut prta okay with it. of course, it was replaced by the diesel engine and a lot of people thought that was ael engd setback. i kind of thing high frequency is not such a bad thing. freque as i said in my opening statement, you've identified sai some of these problems back in january anddng started askingfl public comment which is what wem always heard you to do. so i think you've got your hands around the problem. how do you, you know, when we've gone from a highly structuredroa duopoly, nasdaq, not with options but with nasdaq and the new york stock exchange, 40 are what none hearing now 50 trading fferen platforms, how do you ensure the integrity of the markets, price

discovery, without hurting competition and without hurting degrading those individual models which all have theirgradi strengths and weaknesses? i would ask both of chairman. h> it's a great question, bot because there are clearly challenges associated with our e highly automated and highly cha dispersed and fragmented marketplace. and i thinkur the way we ensure its integrity is to have thosee markets linked so investors thoe orders get the best execution that they can come and that's at requirement under regulation. but looking forward what we have wh do is m ake sure the markets are operating under basically the same rules soo that investor not disadvantaged by trading th same stock in different venues that they should be able to get the best price where ever they are. and i think the issues that arey highlighted by thursday, many of them are addressed, not solved, but addressed well by the creation of single stock circuie breakers that would allow for ct times when the technology gets

ahead of the people by too much to take a timeout and refresh the marketplace. we have raised so many of these issues in our market structure because we really do want to export it in a thoughtful way. while we do that there are some short-term things i think are ta at thereortant for us to do. a circuit breakers are among the those dealing with i the directr market access by customers intoo the exchanges is something i think we need tongdealing with we n these issues around dark some politically and the use of flask orders and others, all of whicht we had in training right now. >> and i think that the let's outside of my lane of that, i t think ishi really important thai the 40 or so venues and at maybr 70 in the future, have consistent rules that are future transparent, the public knows the rules, if there's a timeout or a pause, whether it is fivesf seconds, millisecond or a time-o minute, that it be consistently applied that if you go dark on c stock somewhere you go dark you

elsewhere. you even do it in single stock futures were we co-regulate and so dark forth. >> and i think i commend you. i used the word address, not>> k solved in my opening statement, soo, because i think we're trying to address them but you never quite solve all the problems. a you know, i also believe in both you and your statements, chairman, you mentioned are men already increase vote to become people on the edge of their latili anyway. so obviously as i said it created an environment. you think, and i suspect there's not one contributing policy ons this. itth was probably a combination. you could have a large trade in the s&pd 500 spiders. you know, and you could point to that h as possibly a part of itt but that doesn't mean that that wasn't a legitimate hedging wast

device. >> i think, congressman, there'. not one king or ones are atal mt reader or something. kir onediverse. that's in a sense of the beauty in ase tmeth markets. but i think that this was a very market turbulent time.hat ts i think there is a lot of price signals by two to 2:30 their going negative. if there was an airplane and noo take you to the indicator lightd now sending charges t back. you also had one of the enginesg start to not run too well because liquidity was stepping out of the market. wel we did see bike to 40, 2:42, a numberof active market makers. they were limiting the capacitye the major exchanges have saidquy their order books seem to think that that means there were lessr bidders in it.ir and in addition to that you hads a little extra cargo, bona fide hedging program, was only 9%, but it may have had some factort

in this. >> and on an sec address, at least dark liquidity as conceptt do you have any comments, chairman schapiro? do you >> billeting i might h add to t? center that chairman gensler rant it is we also saw becausero of the skittishness tand the markets i think a lot of stoploss orders had been injured by investors hoping to limitf their losses. those were run through and a result of market continue to drive down. so one of the things want to mkc look at is the use of stoplossne orders and use of market orders which get you a fast execution but they did a real terrible is price.t along the lines as the chairman, at the very beginning.t the ver >> there should've been some obligation by the brokers not to soecute an order on a 30-dollar stock at a penny. ord that's just good, a fiduciary relationship. thank you, mr. chairman,.d >> and that will hear from the w from tan from texas.

mr. hinojosa. >> thank you, mr. chairman. thank you for having this an. hearing. before i make a statement and he sk questions, i askar unanimous consent to and into the record the joint cftc and sec advisoryr committeed t on emerging regulac issues dated may 10, 2010.y 10t0 >> without objection, so ordered. >> thank you. i want to agree with my columns on both sides of the odd hope m oat the dow jones industrialrs average plummeting 508 points, losing 22% of its total value cost a great deal of concern for of c of us on the house floor 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 a key cost of plasticscause 990-point drop in the dow jones index? >> i don't think there's anye dw question but the fact that we t have a highly fragmented market is a constribut ae nyb qack to creates challenges. it doesn't have to be the resulr that we had last thursday. and we the markets, while dispersed in many of them play by the same rules and have the same tradinge conventions. the marketsconvtions are subject to halting trading in a stock when it reaches ahali certain nprice, then i think we would not have had some of thehn fallout that we had last week's >> having a brady commission wen

which has made lots ofgrady recommendations, tell me, have any of those recommendations me been put into effect?hose >> oh, yes.fect? the actual market wide circuit breakers that existed they were a direct result of the great commission's report and januaryy of 1988. one of the things we're also looking at shortly between the two a19gency is whether those market wide circuit breakershe that have market shutting forart brief periods of time when the the mar dow goes down 10%, 21st and whee and and 30% shutting completely need to be updated and utting modernized. nid that's an average we are mor undergoing right now. >> so if you could tell a me thu similarities then of october 19, 1987,mi market crash, and give e the similarities and is thatd ge being investigated so as you sir said that it not happen again?hi >> absolutely. i've actually back and look atao the brady commission report over the i weekend, and it's the interesting that there funnycar

there were multiple events thatt caused the market to decline. inbelieve it was 26% in octoberl of19987 on that day. and that symbol i think to what we're ultimately find here that there are multiple contributing events. tre difference is that bothre mn trading largely took place at that time on the nasdaq stock ti market of the newark stock exchange, do not mold to both trading, although those trading in thek exchan futures market ts dealing from the trading in equity market. so that the linkage issue againe exist today among the equitye markets so we see anotherxist similar event. were trying to do the same kind of careful and thoughtful review of the event that we expect will care lead us to some kind ofl recommendation that, while notom the same as the brady commission, are similar in that they lead us to further elaboration on circuit breakers, for example, or order types tha when might want to limit goingeo forward spent i would say one thing, 23 because our membermitn back then and a financial firm,

but i think one thing 23 years t on, though there were computers back then, nothing like we haver no. c this whole concept and tradingn. in nano seconds and microsecondo and automated trace. s that's whaect both of our agencs have active reviews. we have an active traders revief traders looking at issues of review o collocation wofuld've put the ts computers where the exchanges are, looking at issues with regard to account identification and all of the issues in terms of access to the markets of is these high frequency traders. that's something really new in y this market environment from 23 ago. in >> chairman gensler, let me ask you a question been with that comparison that you just l gaveu we need the sec and your group, the cftc, to step up to the s.ec plate and danger that such market disruptions don't occur in the future. do you have in a funded and authority to prevent such an au event from real current? such

>> well, i thank you for that.on we were sorely underfunded agency and actually shrunk about 23% in the eight years before. this administration. in e e yeareforeress' helper back to just about the size we were 10 years ago and we've put in aago. aquest, for where the over-the-counter derivatives-cor came. we do need more enforcement reform lawyers, cops on to become elit more computer systems to try tor stay up with the automated surveillance that we need of these b markets.ed >> do you believe -- i think mye time is up and i thank you, mr.i mr. chan. >> next we'll hear from the >>ntleman from oklahoma, mr. lucas, for five minutes. five minutes for mr. rice for m

california or oklahoma, as the,e case may be.case may >> thank you, mr. chairman. i think it was once an economit who gave us a bridge perspective econ they said when congress doesn't understand or like something, like work or investment, congress has a tendency to it attacks it or legislate it out ofendency existence but and i we might about that when the legislation was referenced about order.hat and i wanted to ask chairmand schapiro, there is legislation here in congress for transaction tax on every financial transaction. trans and that is going toac ask you f is the solution to the slow our markets through this transactioe tax on financial transactions, or is the solution to speed up our protections through real-time circuit breakers? protecmentioned earlier in my opening remarks the concept,n

that germany has employed with respect to looking at individua stocks, individual stocks fall more than, you know, 5% in five fivetes then you have those circuit breakers go into effect thtil the market have sorted it out. sorted itst seemsose circuit brf we put this transaction tax on trading, what we're really going to do is provide less liquidity, and i want to ask if that's a valid concern there in your thoughts. >> let meidity. say i have stud. deutsche boyd individual stock mechanism and an form for a much our conversation that we had with the exchanges yesterday. view is that if we exch can just circuit breakers on we individual stocks, depending brk upon the velocity with which they areer declining, is value. they are allow us to take a timeout for some period of time, will a and that every market must honod that timeout. a lot to make ne

a difference here.we will and i think it's important for us to do that in relatively short order. impor i guess tax policy is way beyond my pay grade, and really myss il depth. way but i don't, i just don't havede of you i gptuess that whether imposing a transaction tax woulr be an effective mechanism to slow the market or not. be i don't know what the impact necessary would be on high frequency or algorithmichigh traders. >> my colleagues have brought up on the other side of theea aisle so i thought i would pursue thee but let me b ask you another ofe question, and that goes to the event on thursday. does this situation justify looking at trying to put all of the markets under one regulator. you have equities, options, future markets. quickt they're all interconnected. they're all correlated against each other. the all and we passed a regular reformat bill out of the house last year,

which i think moves us in the right direction, but you still have two separate agencies witho two separate sets of rules. and i just think about some of justhink aboutat i've seen where, whether you're liberal o conservative or in the center, these think tanks and economist that have looked at this have a all asked the question, you know, if you have the same entities trading the same product 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 moveof noti forward with real world-class regulation? i would like to ask you i'm a rl chairman schapiro, for your view gulation on that. to a >> survey. just say the sec does have jurisdiction over all of on t the equity and options markets.s we don't over the futures

markets, and i know chairman gensler hazard me say thisarket. before, but i think if we are riding on a clean slate we wouly not create the regulatory structure around theseanlate instruments for these market participants we have today and the it would be efficiencies gained by merger of the two agencies. cies. want to hasten to add that, and i was cftc chairmant quite a few years ago and i've been around both agencies.n never in history of either ofgo those agencies have i seen ar loser collaboration oroue cooperation or willingness to support each other as we try tor get done these things we think p are important in each of ourotho marketplaces. and so what we do tnhe't have a ch of merged agency, i think we have agen, it -- >> let me ask my last question real quick. is there any evidence that thee uptick rule would have prevented this calamity on thursday? p i recall reading in an sec study which said there's no way the ia uptick rule in today's markets

could be of assistance.today' marketat's your view on that? >> as you know we did pass a new what's you version of the uptick rule, short sale circuit breaker ruled that's not in effect yet and ven won't be until november.upti you know, it's possible new, rules may have helped. but what we actually understand ct the level of shortselling asa a percentage of trading volume during that critical 30 minutesg from 2:30 to 3:00 was lower tham it was at other times during the day. so to the extent, the salesman t summerlong sales. the uptick rule would not have made a difference specs would lack of liquidity problems do? to the extent that were meshdo sales, it might have made, might have had some impact. >> thank you very much. thank you >> thank you very much, mr. royce. and now the gentleman from north carolina, mr. miller. >> thank you, mr. the chairman. i assume that the value to our economy of securities markets is that it matches, money to invesh

with people 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 iport >> one last brief question. if indeed we do determine whatt. happened and what are the odds that it will be something of ade proprietary nature which will be able w to share that with all of us in public. t >> we plan to make our findings> public both to congress and to this committee next week will o just be an initial findingur oft staff. if there was a need to talk an n about individual trading, there information of individual caps,l then we would work with this inn committee to o do that in thewoh appropriate setting. >> i look forward to letting the chips fall where they may. thank you. yield back, mr. chairman,. >> and now we will hear from the gentleman from georgia speck gef thank you, mr. chairman. mr.t let me commend you chairman schapiro and chairman gensler. your presentations certainly give us all confidence that youe have your hands aroundnt the u problem.onfidenc while you are looking for the causes, you have certainly shown

that you have put certain measures in place to give y confidence to investors to keepe on investing with confidence. seems to me though that what we really have here is a way we're trying to find to stop a freefall in a free market, in a free economy, while it is a very important to keep the markets v free.ee. that is the strength of our markets, freedom. and so as we move with controls, my question has to allow thiscot element that you'rero presentint as the most basic means of controlling this free market. c so at the same time, making sure it is still free to function in ngki the beauty and the strength thao it has. and 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 eyhrive on itty . >> another way to do it will be to allow the listul of market, o allow if its new york stock exchange stock or new york stock exchange to be able to say that we are shutting down or we're going ton slow mode or we'reew turning ofo electronic system for one minute in this stock and all of the markets would have to follow.nuk that doesn't provide all of them that doesn'ttainty thatar we get ntom the circuit breakers. >> my time is up but with the the circ circuit breaker also work for a

dramatic rise in price of stock as well as lower? stock as >> it seems to be less appetite? i will say for certain breakers on the upside. >> and if you had your druthers, would we have a centralized one entity for determining when the circuit breaker goes, or which you recommend that each of the d major exchanges have their own individual and that reaction see thwn indother? >> i think there has to be a minimumre circuit breaker that>t applies to every market that trades whatever the stock is, are we will have exactly thet problem we had on thursday. >> thank you, mr. chairman.we h >> the gentleman from texas, mr. hensarling.d. >> thank you, mr. chairman.nk y, i've been here since thechai hearings gavel in order and never seen the title of ourwas hearing, what happened and what

is next. i don't think i've heard what happened, but i've heard a lot'e of debate about what's next, l which i otsomewhat questioned te wisdom of debating what's next when we don't know what wisdom happened. and perhaps i missed something,e but i think, chairman schapiro, robelieve i heard you say you are working around the clock to find the cause, but you don't you n't answer today. is that a fair paraphrase of what you said? that a ir par >> that's fair. >> and you will share the you trigger as identified with the public when you identify the trigger to? the >> as we -- trigger or -- well understand the causes we will absolutely share those with ther public. >> and chairman gensler, i think >> chaman gesay something smilar, that your people are s diligently fact-finding at thise point.point. >> i would say i think the four

factors we're going to continue to research to see if there's as fifth or a sixth, and so forth. but the four factors i fif mentioned, the turbulent environment, if i can use the ee marketne analogy. and not os,f signaling advises.e and what happens to market participants when you see badvi, signaling is used art to sell, you st rt to lay off risk, if i can use an old market term. thirdly, there were these liquidity providers, some active traders stepping back from the e market. and i a ctthiivnke is also othet just the one we have identified but are probably the others will find as more research, and wee n are saying in a down market weln need to hedge, we need to put ag bona fide hedges. on >> so is it fair to say thaten, certainly have localizedcertaiyh individual factors were the forl the research, but you still have yet to draw a conclusion as to a trigger for this incredible fori violent market volatility? >> i think we're goingncredibl t

staff per limerick funnies next week that will have more in it, but there is a factor that i think we definitely f identified is across the securities markety that individual security cravings down to a penny a share, it really is not swim acceptable in the capital markets when there were moments before $40. so that's something that, that$. cross market or circuit sething breakers. >> it seems like to some extent the hearing has concentrated tht concenated laps what is thehe underlying cause, and kind ofwh turned into a debate over high frequency trading. it's relevant benefits or relative cost. i have in my hand and editorialn that was written, chairman schapiro, by one of your editori predecessors that appeared inroe "the wall street journal" about eight or nine months ago.

in the editorial he posits quote due to the rise of high frequency trading investors both qurge and small into a deeper fe pool but potential buyers and smal sellers and a wider variety off trades.execute choice of bounds and investors now enjoy faster more reliable execution technology and lower execution fees than ever beforer all of that contributes significantly to marketontrib liquidity, a critical measure of market health and something i'l investors value.omething do you have a comment on your predecessors thoughts?thoughts >> well, i do think investors have a lot of choices today. i think that's generally a good thing. i do think that they benefiti do from narrower spreads and lowery costs as result of competition d in our marketplace. but i also don't think they ma benefit from therk kind of condy that happen on thursday, where

part of disparate cause rules across marketplaces, an investor orders were treated weat differently here cancross d the phenomenon of the stock of e $40 trading up any.nonf so while we don't know all the causes, of the volatility, we do know what some of the symptomste were, and we can go ahead and tackle those, i think,an understanding that we want to be cautious, we want to be i thoughtful, we don't want to harm what's good about our,e markets. t but i also think we run the risk rm of losing investor confidence if rkets bu we don't move forward to fix some ofun the the things that e believe in the exchanges believe our problems. we >> i will have you comment on another part of his editorial.>i getting with the suggested 25 dealin basis points per trade tax on all trades. chairman level it said such attacks have been tried before from 1914 to 1966. there was a transfer tax insteao

of .2% on stock trades. that expense was simply passed on to investors, a tax on such transactions would probably tax ouanns wgh frequency traders in the liquidity they bring the foreign market. i know you did want to getliquii dragged into tax policy but dom. you have an observation on or not historically sucho taxes have been passed on to investors? >> i really don't know the answer to that. ibe assume most costs are passey on to investors one way or another. >> i agree. thank you for your time.re >> the gentleman's time has expired now will hear from the gentle lady from illinois. >> thank you, mr. chairman. and thank you to chairman schapiro again and director cook for your testimony today. in the anwall street reforms th we've already passed in house that are pending in the senate,e and amendment that i authored aoredat was included will require evaluation by the oversight council, a systemic risk council, to evaluate,

identify and buy what potential threats to the stability of the financial system. it would also require that theyl established plans and conductsy. estacises in the same way that the department of homeland security and otherns agencies do to potentially avoid or respond to, or contain emergencies that would happen. respond and then still provide a reportn en congress on the result ofhapp what they have anticipate and what they have discovered.n the my question to both the chairman is, the regulars such asmy is thefunctie the authority to do those types of exercises and plan ahead for eventualitiesnd a however.n ahead can you share with me in terms of those types of exercises, reports and plans what had been done prior to may 6 in each of your organizations. and i would start with chairmanh schapiro. >> i may ask mr. cook to jump in hapiroecause of we do something called an automation review

policy examination of all of oum regulated markets to test the quality of their systems. security of their system, the robustness and resiliency of ofeir system and a backup. and that's a routine program wed engage in every single day. we're also gathering data as i said probably 300 times are and everyone is tired of hearing, i'veugh ourda market structure release on issues that will sai relate in some part to systems and particularly the impasse ofe strategies that are you lies by algorithmic traders and highrti frequency traders on the quality and integrity of markets.h >> chairman gensler?egrity o >> well, i just know the surveillance of markets, we are fortunate to be able to get the trading data every day. got last week was notate to at unusual because we, under our statute, ever get the whole set every day. and every friday the five commissioners said in a room and get a surveillance briefed on the activities of that market a

place for that we, but then wele also look ouft over the next wek asked how the futures market ise coming together. so we do it on a real-time basit week to week in terms of our surveillance of the markets. in terms of last thursday, if ir might say, secretary geithner had as and the whole president working group together i think adding for 15 time i call. whole i can't leave the evening, had.. first thing friday morning agaia and maybe a second on friday, i can't recall. but imember t mean, it remains w mutate intoas a this council inm sense.t o but it was af very active crossn governmental collaboration actie thursday evening, friday and over the weekend.s-governntal cl >> thank you.la director cook, did youthursday o >>d anything further? i guess t my question, moving forward, do you anticipate furtherok rigorous planning outf the box thinking about potentia

scenarios that you may noting otherwise have anticipate because absolutely. one of the reason we propose yo largeouple weeks ago a trading system, on the equity side so that we can actually identify much more quickly the activity of high frequencyan idy traders in the market on aore routine basis, and the of high commission will vote in about mr two weeks on a proposal to bas create a consolidated auditn wie trail so we can track from the a inception of in order to execution and settlement every modification, every change them every hand that touches that thh ryder through our marketsettlene process. and we can then do these kinds of market reconstruction is far more efficiently that were ablee to do this one right now, having to combine multiple audit trails too tevery one of our trading venues. >> i guess my question is, on ag trailer after the fact, but from freemptively will you be doing>o scenarios anticipating if someone seeks to do harm in the

market, or to manipulate the for their own way gain, you anticipate thoseenarii potential attempts? to >> i think we're doing that nowe and certainly thursday own heightened our urgency aboutu doing that.ing those i also think having an audit throug trail in understanding the trading data better will enable us to think more creatively thae will other kind of scarce we tr should be think about and worried about. cr i was just going to say, w do similar things in time. we don't think that's enough. one of the reasons we came together to join, formed a joint advisory committee is which of outside experts looking out over the horizon ander say, what's te next emerging risk that we ought loing oooking at. >> i see my time has expired. i yieldng wha back. >> ninety.. >> will now hear from the second gentle lady from illinois.>> ms. biggert. >> last but not least, thank you, mr. chairman. following up on that, i thinkros that some of us might recall we do have chicago first, which is

really a public-private partnership that was created ine 2003, legislation, and this was following 9/11, that was a mode3 for the rest of the country. i think there's quite a few of these groups that have you worked with them at all? >> i have not.i thk the >> okay. so maybe we can discuss that at sometime later. dss that my next question was for chairman gensler, and -- >> actually the answer on some continuity initiatives we q havr we have worked with them. iniat, >> as you know, cme uses a number of risk managementknow, controls. can you explain how cme was ablk to contain, the contingent thate originated in the equity's that markets specifically, can you explain how the stock price you logic works? >> there are a number of risk

management controls in the futures markets. c e stock price logic, which isi one of four, it works within their computerized tradingmarke. platform. and as the market goes down orir up, if the order is in the book are going to be spreading so or much that there'll be a if the what's calledook are stoploss limit orders.at there'a it's a mouthful, but if there im a cascading that i believe goes, more than 6.5 points, then it there' will actually lost, give it fivt ilconds for more orders to comew in, and then it will, you know, it do an algorithm to trade off. that's what h appened right at the bottom of the market at 2:45. algorith the market traded up threeed at quarters of a point and then as it did, it moved up. >> welcome should a similar rule be applied to the other markets, equity? >> well, i think that chairman r eqties?o is talking with different -- there are different

characteristics, but across the platforms to see whether there's something, i was a broadly similar though not identical.ber >> we're looking at individual across circuit breakersing that would operate to stop id ocks hg for a period of time so that algorithms can be refreshed and additional liquidity can beo retracted to the market.attracde >> well, trading technology has gotten ahead of the regulators? if the regulars on the head of the technology, won't we havere? problems like last thursday andd >> well, i am very proud of thes group that the cftc, i mean, iwl inherited most of them, but it'e i terrific group that but i do think we been underfund onem. technology. t we have a significant investmeni in front of usnk to do what weai called automated surveillance wt and compliance. we are trying to build the flags and alerts to look at the hundreds of thousands of transactions a day by basicallyf was called exception reports an inflating them for good people

like mr. share to sitting behind me and his team. and >> we are significantly underfunded in technology. our discussion a technology budget for development projects is suntill 50% below what it wa in 2005, and our markets are inst and complex. >> i know, and i've asked you a mplex.uestion before. how old is your technology? is it 10 years, 20 or?fore. >> i think it depends system by? system. for example, because congress has been just the last year prol we've been able to build some new technology tos consolidatepr our complaints and referrals new more effectively. but we have some of which i and recall from when i was commissioner in the early 1990s. s >> and as you talk about your markets, i think it's been saido that you're still aggregatinghik data from 50-cent electronic ite trading venues.regating and this really highlights fragmented nature of of ourighlg

markets, while this fragmentation may be, at least partially to blame for this, thursday's market drop, is there also hampering the sec's search for explanations state? forhis well, i m on plaques. it a singlei ve beee been enviousny marketplace, largely, andenve yf conduct their analysis. chai to do it, downloadoad voluminous files from multiple narket participant. dow 19 put 5 billion shares of stoc ckaded on march 6 in 66 o sto transactions. ones were addone analyzing thatn do need to compare our analyses with the cftc so we are sure where linking the two markets together appropriately. so w so more technology, absolutely apuld enable us to do this job a little bit faster. er is there a plan and timelinet

for implementation of updated ie technology? >> well, we still don't have the resources to do much of what wet would like to do.ed the commission will consider in the next couple of weeks a proposal to create a the c consolidated order audit trailoe that will give us a vast amountt of data, make this kind of reconstruction far simpler than what were going through right ut now. data andake that will largely be developedrc by the markets, and we will hav full access to the data. delope >> the gentle lady's time hasest expired. >> thank you. >> the gentleman from massachusetts. spectrum one. i want to thank you for comingu. today. i also didn't expect a whole lt of final answers today. that you, for theof fin next several weeks or more will come back with a more thorough response. aptharitnk f that's appropriatr thing. but i do want toe focus on onee thing i think is in yourpproprie purview, not so much for a focus conclusion as much as just questions. particularly chairman schapiro, the decision to cancel trades.

conc i have no problem with the concept.rticularlychairman my concern is where do you draw the line? and if you design a give or taku 300 entities or whatever it might be, if you're going to cancel son, why not just cancel0 them all? take out the timeframe when the, people start to fall off the table edges on that point forward, somethingsome, went wr, peopuse no matter where you draw the line, someone is going to tm get hurt and somebody is going ro sue somebody.no mte and they'll probably sue you,ebg not me, so that's okay. i just don't understand why you. do the line that you drew. i >> we didn't draw the line, although let me agree with you r aloughs a highly unsatisfied process from my perspective. under the rules of the exchanges, they draw the line about when to cancel the road is draes. and they met right after the market close on thursday. >> they who? after >> the stock exchanges. and they come up with a common standard to cancel the trades a.

prices that they think are sharply diversion from previous days close. that they selected and it would be great to ask them i think at tht they panel, 60% off the prior days close, or the 2:40 close, the last solid trades in thehe market. the a threshold, and/or threshold would have resulted in many, many, many, more trades beingre canceled which would've had soma ripple effect in theny, marketsn terms of traders who were headst and other markets it would've had this straight cancel button hedgesville standing. but it's clear that it's not a l process that i think works to the bench of investors. so when we've brought the i exchanges to town on monday, we asked them to think about how we can make a more certain and clear process so that investorse know up front what trades mightd be broken and what trades might not be broken, if we have u another kind of event like we had on thursday.nt >> i hope -- is this issue nowli

settled, iket' ws edone, going s forward, but for this particular buy is that decision final in stone not to be reviewed? . .t 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 th the rules in the futures markets are very tight in what is called a busted trade that have to occur within a certain number of minutes after the

trade and there is a certain -- i didn't describe earlier but a limit as to how many takes away from any future of trade could actually generate -- >> to a specific standing rule? >> that is correct. >> at least everybody who gets into it knows what the rules are. >> very transparent. >> that is the problem with the other exchanges. we have enough problems with this generating hundreds of thousands of lawsuits on the basis of probably tens of billions of dollars, doesn't help the situation. i will next -- help the next panel. >> now we will hear from the gentleman from california. >> thank you to all three chairmen. i am trying to understand what we know and what we don't know. chip in at any point but

rapid-fire questions. if we focus on these well-publicized trades and p&g which didn't have a penny. those trades occurred and were consummated, correct? someone bought and sold those stocks at a penny. what sort of volume transacted at that level. >> i will be happy to provide it. there were 300 stocks where trades were broken because the sabers 60% or more away from the market and someone told us about 19,000 trades a. >> across all those securities? at significant volumes. in a given security were there 8,000 shares traded or 300,000 shares traded at a penny or do we know? >> i don't know that we have

that data yet. >> where birdies trades transacted? new york stock exchange? the nasdaq? other exchanges? >> that is the nature of our fragmented and disbursed market place. no stock exchange trades more than 25% of the volume. we have so many trading venues. so they traded in markets like the nasdaq, the stock exchange, in dark pools where they are not so transparent and internal invasion by dealers said there are ways for security transaction to be secured. >> take a given security that traded at a penny, if those transactions occurred on multiple exchanges that a penny at that point or do we know? >> we don't know.

>> okay. i suspect the lot of this is what we don't know and what we need to find out before we can jump -- you can or we can jump to any conclusions but i understand there's no turn in market orders. how does it run of through $30. it is of market order, it has to run from $30 to a penny. >> in some cases there were and some weren't. >> they started to drive down.

nervous investors, at the market sell order. as they go down and sellers remained in the market. they -- that is where you get beat any price. some of these orders it that. they have no circuit in the marketplace. whether we have to have real market maker applications for type spreads and get rid of the obligations to end up -- >> there's a difference in rules in the future but i am not sure you could translate one to the

other. there is no stop-loss mark the order. both of the major exchanges, when the stop is it when the price goes down and hits a price and the order goes in. there has to be a limit to it. >> what has changed? this could not have happened, i suspect, 15, 20 or 40 years ago. particularly if you go back to traders on the floor. what has changed that enabled that kind -- market orders are not a new thing.

>> volatility is part of markets. and in the future, the computers are located right next to the exchange engine and everything is down to a nanosecond. >> tremendous volatility in 1987. make the market place what we had at that time, on the stock market. and volatility, market as a whole.

>> mr. foster? >> does anyone understand the origin of the high share prices that were reported, $100,000 or so but will these bids to the nature of a firm's? >> there were stocks that traded at 90% above their 2:00 p.m. prices during that period when we had 250 or more stocks that traded at 90% or more below the price. don't know if we know the reason. >> we traded below and above but we do not know the nature of the orders that came in. >> that is part of the information we are gathering together because we talk about

where the orders or originated and which trading venue and find out who put them through. >> so you don't know who it was? >> one of these is called snipeing. the computer put in a bid one security at a time and tried to plot the liquidity and find it. if there is a resting bid at $100,000 the computers can strip for and find it. maybe that is what happened. >> other mandates that are

version and archived to reproduce their trading decisions after the fact in the course of these investigations? >> we have asked for some of these largest traders to see their code in that division of market surveillance, sitting down this week with a number of the largest ones and looking at their codes? >> we over wrote it. other and forced industry standards to say what version were you running? >> yes, we can see their code and we reminded people we want the code frozen. if they're not regulated we need to get that information by a subpoena. >> explain how trade busting

works on synthetic positions. the underlying stock determined to be broken does that imply the breaking of synthetic positions? is there an agreed upon way that that should happen or is that the way it happens? >> i can speak to how security trades are busted. it is a pretty unsatisfying process because it lacks real clarity or consistency but changes in this situation, your normal trade bust situation is the single stock, something that goes wrong in the technology and you need to bust a lot of trades in one stock. exchanges come up with a common standard so they are all at the same level. >> how does that percolate into

positions that are derivative positions? >> i don't believe it does but it has an impact if they have hedged its position, they got a head and they are exposed. >> in the securities market the options market would make the decision whether to break the trade if the underlying security trades have been broken. there are very few options that were broken but somewhere, the process was not fully coordinated. the option market made the decision separately from the securities market. that is one of the things we're looking at going forward. >> i don't remember everything about their role. we had the indices' themselves. they didn't reprice their indices. they didn't say it was a different thing and i know that it was relevant to those

markets. >> did you say that overall what happened thursday strengthened or weakened the emergence from the sec? you know my position that it should be moved to chicago. >> i long-held a view that the two agencies should be merged in these markets. they are similar and increasingly linked and there would be economy of scale to a merger. in my many years of being around the agencies, i have ever seen in collaboration, i never was sure the events of there as they

would have played out differently had there been just one agency. >> to share the development of software tools to analyze this? or just independent groups? >> it took an act of congress to create a joint advisory committee so the ability of federal agencies to share things mystifies me. >> you didn't know you were voting on it at the time but was part of the appropriations bill last year. the support of these -- was collaborative and closed. the will of congress has been since the 1930s that we have one agency, strong agency and the sec overseeing its orbit and

derivatives markets, and over-the-counter derivatives markets. >> that complete our question. i want to thank both of you, something mr. scott said in his questioning. after hearing the testimony from our two regulators i feel more secure. i feel a lot more secure and look forward over the next several weeks to open disclosure as to what you find as soon as you find it. to participate in such rules or changes that can help prevent what happened last thursday. with that i thank you both so that you enjoy the rest of your day. >> thank you, mr. chairman and

the committee.

[inaudible conversations] >> be seated. i thank you for appearing before the subcommittee, and your statements will be made part of the record. you will be recognized for a five minute summary. first of all, the chief operating officer of the nyse x. >> members of the subcommittee, i am chief operating officer of the nyse earnings. thank you for letting me be here today. we appreciate your rapid

response to the events of last thursday. it has been very productive. we want to restore confidence and safeguards in the future. the high level cause of the events last thursday and clarification about the market model and how it worked and our recommendations going forward. everyone is looking for a smoking gun. the circumstances are more complicated than that. link the interaction of various markets. there's no evidence of a fat finger era market manipulation. more and more, they are intertwined. with adverse european news and broadly based wave of orders at

2:30 p.m.. the signs of order books which accelerated dramatically for the downturn. there are issues that resulted in certain market places not interacting with one another. the nyse has embraced electronic trading. and cutting edge technology with human judgment. the hybrid market rules expressly provide mechanisms to mitigate volatility and a large price swings which is a critical piece of our offering to listed companies and their investors. specifically incorporate in our trading structure the circuit breaker mechanism known as liquidity replenishment points which temporarily and automatically cause trading and stocks when price movement occurs. on a typical day they are traded 200 times lasting for seconds at most and during one of the recent financial crises the market well.

the mechanism does not hold trading. for short time trading is paused to facilitate more accurate price discovery and prevent the market from a sudden insignificant move. hour quote is visible to other market participants. our l r ps are analogous to taking control of taking the plane off of autopilot during turbulence. the want to clarify some anecdotal statements. this is not meant as a comment on other markets or market model. just to clarify what we saw. during the 3:00 period market share was 5 percentage points higher than usual during that time of day and participation in our market makers, this is evidence that they would not walk away from the market.

stocks had price declines and erroneous explanation is far greater than the listed stocks. the marketplace people and middle 15,000 executions after a thursday's prime. the largest share of orders in the marketplace, we had to cancel zero trades because of the protective measures in the market. they are not intended to prevent the market from falling. they're designed to protect the integrity of the market by preventing a downdraft in mitigating systemic risk. it was permitted by the regulation. the bottom line, other such mechanisms. the mechanism is truly effective if observed by other trading

venues. and an industrywide -- three main topics as:what chairman shapiro stated earlier. we had a coordinated way to have extreme rapid volatility. the system has worked but market watch circuit breakers are necessary and will be more so. the trading venues agreed to develop these circuit breakers to pause trading, and paused dramatically in the short period. once they are triggered it will apply to all trading wherever it takes place. the circuit breakers were established long ago based on market moves of 20%, and 30%. the circuit breaker will be based on a broader index rather than a narrow index. the rules on cancellation of

trades. after markets closed, any trade executed at 50% above or below the last price would be canceled. this was not predictable and cause computers in the market. we were working to establish clear rules in the future. to facilitate a review of extraordinary trading we should consolidate on a trail that allows regulators to review market wide trade data. we understand the sec is developing such a proposal and we are assisting in that effort. and this achieved market surveillance and securities regulator. we also at the same time need to ensure the sec had full funding required to perform these duties. the broad base market review finds ways to encourage the market structure.

we applaud the sec for working together to review the events for a coordinated response. once again, thank you for the opportunity to appear and by will be happy to answer any questions you might have. >> now we will hear from the executive vice president of the nasdaq transactions services. >> thank you for letting me speak to you today. we met with the fellow exchange of chairman shapira to combat market instability and protect investors in the wake of last thursday. we will act jointly to implement changes to enhance the ability to handle unusual trading events. market's rapid recovery concerns

it is resilience under ordinary -- and look at the state of the market headed into last week. markets were nervous and operating during an upward trend. the market below 14 -- the nasdaq composite index has risen steadily on april 26, 2010. >> could you see if your mike is on or close enough to you? >> markets were also increasingly volatile in the volatility index which measures volatility of the s&p 500 expected over the next 30 days. it is normally below 20. on may 6th and seventh closed above thirty and above 40 on several of those periods of time. this increase paula ~ on the

escalating financial crisis. the dow jones industrial average was trading off 271 points for the day and 500 in the last three days. the mercantile exchange was experiencing unusual trading activity. and handling the equities to that future. volumes rose and prices began sinking rapidly at 242 before equity prices sank rapidly as well. and the trading became so volatile that it triggered an automatic trading pause. the future immediately leveled off and began to climb rapidly. equities followed shortly thereafter. the exchange began experiencing data communication issues between it and other exchanges. simultaneously the stock exchange began reporting multiple liquidity replenishment

points that impacted the trading of individual stocks. from 2:39 to 2:47 the dow dropped 723 points combining 86 in 9 for its low for the day and 995 points total for the prior close. the dow recovered just as rapidly from 9862 to 9974 down 387 points. the dow rose another 45 points ending down 242 points. the preliminary analysis indicated unusual trading activity triggered by a confluence of unusual events including those outside the equity market. nasdaq continues to investigate but there is no smoking gun that singlehandedly caused or explain the events. from a system standpoint the nasdaq market operated continuously throughout the day

in critical 17 minutes. each of the electronic systems function as a sign and as intended. we detected no system malfunction interacting with the nasdaq stock market. response of the sec supports the recommendation to update market circuit breakers. the circuit breakers should automatically halts trading of all stocks in all stages. we expect the chairman shapiro will have to announce this about what those will look like at the end. and single stock trading, the consistency across the markets. initiation by the primary market and orderly resumption of trading by the primary market. any rules unrecognized the stock

in different ways. and other regulatory actions should not be for used for a primary market place for any competitive reason or disadvantage any national market system participant. thank you again for the opportunity to share our views and i am happy to respond to any questions. >> the gentlelady from illinois. >> i would like to welcome my constituent, mr. duffy, for joining us today. he is the executive chairman of the c m e group. i thank him for sharing his expertise. >> thank you. members of the subcommittee, i am terry duffy, executive chairman and thank you for allowing me to testify today.

futures markets are leading indicators for cash markets. our reviews of market activities revealed no erroneous activity by our customers. the exchange did not bust or reprice any transactions and our analysis indicates the decline in the -- proceeded to drop in the s&p 500 futures contract. as i will show you in a moment they were far more severe even after substantial price recovery and opposed to the s&p 500 contracts. liquidity in the s&p futures and effective spreads were considerably better than those throughout the day thursday. at this point draw any definitive conclusions as to what caused the market volatility on may 6th. .. 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 >> we believe the focus of your review should be on the nationa market system.ieve the focus we support chairman schapiro'svw recommendation regarding the nil harmonization across these platforms.stem. we have seen no evidence that recommdation r or other specific trading practiceseg in anyway magnified the decline on may 6.r in fact, we live high-frequencyy traders in our market provide a 6th liquidity on both sides of thevh market in this extraordinaryr day. we do however recognize that rdaoges should be considered to avoid a repeat of events of may 6.ver, we would make the following change recommendations. asde chairman schapiro pointed. out, circuit breakers including

circuit breakers for individual stocks such as those implemented t, for dividuross the market that we would stop loss function of t should be adopted acrossnyse margaret on a product by produco basis. to prevent cascading downward market movements.uld the circuit breakers levels of n 10, 20 and 30% and the duration of the halt and timeless of which triggers are triggered. day at w to determine whetherhi any chans are warranted.d be in a such changes must be a limited across all market venue anyt i thank the committee for the opportunity to share these views and i look forward toimlec i than theyour questions. >> thank you very much. >> now we'll move on to >>estion. i will take my question thank pd first. >> mov mr. noll and mr. leibowitz, mr. ening to your testimony, i'm not sure anything happened on thursday.z, everything worked, is that correct? happene >> oh, i don't think any of useg would say everything worked. wo. i think, in fact what mr. noll

was saying was a systems work but i think we'd all agree the market did not. and i think -- his systems >> what caused that, the market do not work?agree th the >> i think what both of us have >> wha found is liquidity's lead the? >> market, just as through the dayt as the market was get his. then an overwhelming wave of ar the mame in on the sell side that just build on its cell. ane i think having a market wideheel circuit breaker in effect wouldn have helped mitigate that having problem, but in effect thecircui market would be liquid justped m after longtime as hell hell that orders broke into the market.rog >> i think, mr. chairman, i think there's two things to broe observe that happen. i would agree with mr. leibowit that the markets did not behave normally on that day. myob point was really our i think my behaved the way to design to behave at a. i think it's important to observe two things.da the market circuit breakers we do in fact i have in place todat were not triggered. the market did not fall to the point where they were treated. and, therefore,have in caused tt

udall. i think chairman schapiro is we should,n she said in fact, we institute those and revisited different market circuit breakers that will is arrest those marketwide halls as they have. s i think theays other point tha made vividly today, we certainly agree with nasdaq is we do neede a coordinated stock by stock circuit breakers across all thee market. which we don't currently have on our books and we don't currently have directed toward authority a to implement, and so i think wee will see that soon coming out of the sec. >> there was no problem on your part, on either of the two pa on ees, the fact new york exchange didn't slow down with a operation, butt nasdaq continued going right on all out of thesln sails through to the nasdaqdaq exchange. that had no effect, is that correct?hrough >> well, i think we would say that was a contributing cause to a confluence of events here. ist and it points to what we would s argue is a need for a

coordinating stock by stock ointsit breakers. >> from our standpoint i think what we have showed, what weinad see, we don't see the fact that we are moving slowly exacerbate the effect that, in fact, the wd facton that we're trading high market share keeping the stock prices in line might actually tt have helped in the fact thate si other markets did have circuitl breakers like the nasdaq listede markets, had even more damage than in new york listed market. but i think we can all agree that having uniform marketwide circuit breakers would have he.ped in all of t all >> i have a question.arket wide everybody wants to protect the private market and have theerybd market function, but is this th avrst time you've made that h observation, either of the two major markets, that one set of rules was in place in the newobe york stock exchange and anotherk set of rules and nasdaq, andas n that you were coordinating to operate in tandem together so that this could happen? or you didn't realize it? to opm

>> i think what's there, mr. chairman, is our markets are very coordinated in many ways. we have very similar standard for listed companies.e very as an example not having a trading, but for marketwide decline, markety circuit breakers when they recorded, with open lines that we quickly use during problems. >> don't get me everything that you're according.during tding i want to know why this operation occurred.thing tha >> we speak oftten about manyono issues. the one issue that had never appeared yet any problem betwee >> i'm abr two markets is a coordination of aou stock by stk circuit breakers.ared yet as >> and what you are saying isca because it never occurred, you did not simulate the possibility that it could occur, and you dit not cooperate together to put it place, and rules that would didt prevent it from occurring, is plat correct? what i'm trying toac drive yours obviouslyt too frequent market>g

, obviouns, relying on the congress or the regulars to take a the problem rather than doing it yourselves.ak >> so as permitted by sec probl regulation we do have different >>ight. models. we rely on designate market regula of an obligation to the market. they have ations, we d differenn trading model.ignated mt so there are various areas where makers different.ifferentype of we have seen times during the crisis in the fourth quarter of 2008, where there was t significant breakage of trace any electronic market.f that there were not in the nyse traded market. e at the time, no one felt that the severals exacerbated theded problem. it's just that there were morere breaks in electronic market. there were tens of thousands of trades taken off the case in the fourth quarter 2008. >> my time has expired.rt >>e gentleman from new jersey.. >> and as also the case, i will the follow up with the chairman with perhaps going on that.>> and ass

so is this something, in what you're saying there, is this a whtuation then, thinking back if you hadat 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 had a set of roles in place which governs the respect ofwe different markets and when they're going and not coding, and a whole set of procedures around that. we believe have worked very welu up until this point. ha workedlieve they continue to work very well, and as a matter of fact, operates an electronic market, participates in as well as the new york floor. they were engaged in stable ope electronic trading as we were on they thursday. and participate with it. so generally, i think that will. set works extraordinarily well.. we did a confluence of events were clearly we need to do something to address.uence o i think what chairman schapiro d suggested which we agree with fully is that we need that chair coordinated stock by stock

circuit breakers. >> and just to go down that road a little bit, mr. leibowitz,toct maybe you are touching it a bit i would hearing what you're mr. saying, as far as the issuesoucn that are out there, confluence os issues, was one of thoseas fh issues that were in a confluencc of what was going on over in the luence whe fact, and mr. noll i think you said the in u.s. finding was paying the f attention to that, and part of .hat the fact that the value oft the e.u. currency was goingheact down, other foreign currencies, these of the relationship was tt going up and that the banks arey having a different time with their carry trade in that respect, and so in order to dead with that they had to do aifficu something, which i guess is to r unload equities.t they had was at an element of always coming out of that period of time? >> i don't think that we had ann visibility into that. we haven't heard element that. t i think we're really focusing on our market and leaving the sec and the cftc to understand thecg

cross market effects. >> does anybody else have a thought on that as far as with e the influence of that, being one of the confluence is of their a impact, they're traitors will? >> we have seen no evidenceth o that.heir as larry said we're very focused on what happened on our individual market.said, we're >> to the extent on individual onrket, the chairman was saying before that here we are still time to get a ill the dataaying collected from all the 40 or 50s however many there are right now data sources. there is no central repository thr all those traits, and that's why she's going out to get himes d that has i guess it is that a problem? going is that something we should a a seat in the past and try to address?hing t we >> i think the chairman and i td think other people in workplacei think her pized that was a potential problem before.zed tha as a matter fact, there have been ongoing discussions in allh the markets about consulting auditor. that predates the may 6 event. it's unfortunate that we have not gotten to the point so far in the marketplace,.t.

>> is a something that holds that up?o that p >> as far asoint i know, no one that u opposes that. i think it's a matter of applying the process. >> who is responsible for the? t >> again, it's a marketwide issue of multiple regulators. pe i thinkss and there may even bea absolutely positive about this, but there may be some congressionalsu authority needed thisbut ito do some. >> in to the point, as far assoi what authority the sec has now. authwhat they may need in the future, one of the point has ordered an address and he raised his the, now the of the market collars that potentially put onx is there a difference as far as folks are at the table right market now, the major participants in it, and some of the smallernow, particative platforms as far as whether this should be uniformo across them all?al and if theler, answer is no, wha shouldn't it be? and if the answer is yes, would d if tmpact upon the slightly

different models of some of the smaller market participants? the >> the answer is there should be one standard across aller mart platforms, whether in exchange, etf, in a different idea and it will be. >> and we didn't have anyex of them here, but if they were sitting here, what with their argument be what it should be that case?idn't hav >> i don't believe anyone woulde argue against a stock by stocket circuit breakers. gu >> i think the industry at this ouint would line up 100% behindi it. fav >> what about the timeor to mplement these changes? as you said, a lot of this is the look out for longer to time. mns took a long time in or toe. implement, we're talking about implementing this like quickly,g is there a problem as we move too quickly at this point in this time or is this th le right thig to do?ove >> we think on the market rights

of circuit breakers issue i think we can move very quickly on that. and the chairman will be the discussing with us making rule five, adopting these marketwide circuit breakers relatively wit shortly, and they willus, proces e then wd put them in place. i think as we deal with some oft the stock by stock issues we may run across some issues. some stock by stock circuit breakerse issues. >> what issues do? >> wha some technological issues. putting them in place but i think those>> stock are short d. >> i thank the chair, thank thet witnesses.ed. >> thank you very much mr. garrett. the gentleman from california.hy mr. chairman. >> thank you. we're talking here about how to mr. sh make high-frequency trading here safer. the question is does it feel, hh fulfill any social utility at all. in the old days somebody would

want to sell a stock for $10, and some else might want to buy it for $10 a nickel. i remember whenever 18th of a point that and somehow there was a settlement in between, and w maybe one or the other of those two real investors got a of slightly better deal. now there's somebody with a fast computer who could come in and scoop up that 5 cents to make sure that neither of the real investors benefit from it. what -- i realize wall street makes a lot of money from all wl thisl high-frequency trading. but the question is, does it qun help provide liquidity which -- or in some other way allocate capital? o now, the events of last week ale

seem to indicate that high-frequency trading doesn'tt provide liquidity.in it uses up liquidity, demands fr liquidity. and, in fact, there was no liquidity for a few minutes. up so i will start with mr. leibowitz. mr. e didn't have high-frequency tradg, wouould this hurt the companies that are doing business and their employees? >> sure. to stay away from ness and whether there's any social by to this. what i will say is -- is not i'i correct to say in a passive summary so that $10 they want to buy it, the master. somody the difference was there were tb physical people rather sitting on the floor of the stock is change or market makers in nasdaq. there's always been manualther they trading. what they weredo on t ihes theyp buyers and sellers. or in na sometimes they play well, sometimes they don't. they just mashs al them togethe. sometimes when someone wantswa d stop the pipe doesn't have to b

the. e ey're matching different time horizons on the buy and sell. i think as technology causepersn trading tuesday that people were unable to keep up with that in y market making capacity. that's what the specials have been placed -- replaced by high-frequency trading. with the obligation to our by mt market. they have to have a quoting they hement to have to buy a certain amount of liquidity and not allowed to take more than a certain amount of liquidity froo the market for their high-frequency trading operating in a very structured speed is what% of the high-frequency trading is done by these, i'll freathe old term marketmaker? >> i was a, first in the case o dmm, they provide 10% of the liquidity of the newark stock exchange market. they there's another form of o marketmaker that we have also it the variety that is that neithe 10%. i would say on a broader markett -- ano >> i only have five minutes. i'm not asking what percentage h of liquidity is provided by

these individuals. i'm asking what% back of the high-frequency trading, it's been reported that two-thirds o high frequen the united states are these high-frequency thaders, and you're describing unit states eem toir be just a trad smallar percentage of the heidrick with the trading. >> i would estimate about 40 to 45% of the market is high-frequency market makers of some form.% either dmm, s.o.b. or other things. fre the balance of what you make into two-thirds is really out os rhythmic trading.th that could be a big mutual fund that couo sell 10 million shares in electronic foldrm implement g a series of small trades that looks like a high-frequency trading. so you have to be real careful, and that's why we hardly shares endorsed chairman schapiro'sh large trade reporting scene where we can get thethat'shy transparency into these endse high-frequency trades are t doi >> most of us when we think inso terms of high-frequency trading are looking at those who are whn

buying and selling the same stock within a short window, nog somebody who is selling andoo installing and thenking sellinga which as you say could be an investor deciding to unload a s stock or a portion of the. mr. noll, do you have a common? >> yes. i think when you look at notommt withstand last thursday's event, when you look athi the quality f our market or the last severaln years, i think you see an increasing tightening of the bid offer spread, and increasing liquidity at those types ofcreag spreads. tight so iening of think our concern f in we look at this issue, and we agree with mr. leibowitz and chairman shapiro that we do have to study what high-frequency traders are doing and how they're operating in the marketplace. i think that prima facie to evidence is found that they provide a real value is that they provide the a market, a provid tighter spread, and reduced cost all market participants to provp they havee market. i do think, however, we do need to also look at how theyicipant interact with the market on an ongoing basis.thhoweve

i think they provide us we in te liquidity. on an >> obviously, last week they were the cause of the absence os liquidity, what i believe myey time has were t expired. belican respond for the record. >> you know, i would say that w are not sure that is, in fact, the case. t i think it's an overstatement tn say we know.case. that's an issue where continuedo to look at this point that it thatnrs to have been a very broad market selloff with manytk market participants, not just high-freque ncy traders involvement. sell-f >> thank you, you. the gentleman marke from alabam, mr. baucus. >> i know history teaches us there's been pretty dramaticnow pauses on the market in before with electronic trading.ramatic elonicon't think the culprit high-frequency trading.ng i guess that's part of the culpr debate. you know, one thing we can

never, i think we can neverhing prevent is negative market development, or economic developments from affecting the market. or ecoc so just trying to think of, you have shifts in senate's that's sohat's gmove the market. so what you really want is the market to reflect all those things and to do it i guess as efficiently ast possible. s, i am very encouraged by what i here today, and what happened yesterday. and that i think that there's been made as a result of last i thursday, and concerned that i think everyone had before, is cn that we are coming into an evere agreement that there ought to bd some sort of marketwide circuit breakers, is that right? there o do you all agree on that? >> absolutely. circu >> and a coordinating maybebreas

stock by stock. circuit breaker >> we all grew without. maybe s >> mr. duffy, do you? s >> we agree with that, and weagt see no issue with that. but again this is an opportunitw to saye we don't trade individul the ks. >> right.gr what about, i guess if you trade in option or you trade etf or yu something, you trade options. o. the moonies, do you trade those? >> cme group? no, we trade options on futures. >> okay. futures >> we don't trade the spider.s. >> okay. let me ask all of you, you become we have kind of gone from a highly structured duopoly, ord at least with the stock trading, to a much more fragmented least system. how would sto you advise regulas

to meet the challenges of addressing market integrity and price discovery without hurtingn competitiong?integrit p >> i'll be happy to start him it the i think this is more your >> i belly, jumping. s i do think that you need to have the same set of standards and protocols across the multiple you ne markets. stanrds and it'se as simple as that. you can have one set of rules oe ite nyse and nasdaq and then you have different sets of rules that other. it's just are going to work it is a recipe for disaster. no one has been able to explain how it went from $41.2 a penny.. and that to me is amazing. you can explain it.in i think you have to have the yoaveprotocol across these marketplaces. t >> mr. leibowitz or mr. noll? >> sure.meol acros the i think that it is clear that>>e the complexity of our market or represents the challenge forno regulars. represents a cbt about it.

iha think that the sec is tryin to respond to that challenge. i think the concept to reviews.. various aspects, what is a ds, regulate event, sponsored access are actually while time and they need the resources and need to been able enough to get through the. all wel and i think the challenge is that te it's just that we're in a violent that is wrote to the complex. through small changes have unintendedont consequenconsequences. for example, just to save lesbian high-frequency trading i think we would be stunned with the consequences. just to say, i think even small changes havey very big effects that we may not see. and they just need to be careful while at the same time in, moving quickly when we see a toc problem we all agree like marketwide circuit breakers one individual stocks, that's anwhag easy one. that's a no-brainer.it >> i would agree with mr. live with, and i think some of the things we talked about already indicate we are moving in thatvs >> i agree, both a marketwide circuit breakers and stock changing marketwide circuit breakers for,

the entire market as well as talking the about things like ot trails and other functionalit functionalities. is a very complex market.cuit at i think chairman schapiro and t chairman gensler are fully awar. of how complex is and have thee. tools to deal with that. and we're here to assist them td do the. >> mr. leibowitz, once you said saidree with the markets and exchanges handle volatility. quite well during the financial crisis in 2008.lity quil in they didn't, they didn't react quite as well to the volatility- you know, last- thursday.o hat do you see as the difference? >> is interesting be lcauseas w, actually discussed this at see considerable length.di i thinkff iteren has to do withs happening at a certain point in di the day. a lot of news on a financial a crisis came out overnight whereh markets had a adchance to absorb that news. this is something that happeneda during the day.

as mr. noll essay, it was almost like set up. that the market was in a jittery situation. there was nervousness about in a your. n.atioen there was speculation to today and the announcement os what's going on in greece but it just happened at a bad time.re s had that news come out d and overnight, i guess it would not be nearly the source when as we saw during thece. day.ght, we >> your time is up on that. let me ask this, this question. on the circuit breaker concept. right now, we're any situation where we have computers who are using very difficult com mathematical formulas to trade millions of shares of stock inre milliseconds. of and our solution to ti