FEDERAL regulators should address the "casino environment" on Wall Street where computerised high-frequency trading can trigger market-shaking turmoil, a US senator says.
Senate Banking Committee chairman Chris Dodd pointed to the new phenomena of automatic programs - trading robots - buying and selling stock in nanoseconds as a possible cause of last week's meltdown that was felt around the world.
The market fell nearly 1000 points within minutes before rebounding.
High-frequency trading uses mathematical models and computers to buy and sell huge numbers of shares in milliseconds.
It accounts for two-thirds of all stock trading in the US, and proponents say it makes the stock market run more smoothly by efficiently connecting buyers and sellers.
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One theory for Thursday's decline was that high-frequency traders pulled out of the market briefly.
But Jeff Wecker, chief executive of Lime Brokerage, which caters to more than 100 high-frequency trading firms, said his clients bought and sold stocks more - not less - during the steepest drop.
"They're the reason the market rebounded as rapidly as it did," he said.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are investigating the cause of the drop.
- Did a single trader mistakenly punch in the wrong number of shares when making a sell order, maybe mistyping "billion" instead of "million" and setting off a market-wide panic (known as the "fat fingers" problem)?
- Did high-speed trading robots that are supposed to make markets work smoothly go haywire, sending stocks into a nosedive?
- Most important to anyone with money in the stock market: Could it happen again?
Maybe the scariest part was that no one could unravel what happened.
Thousands of trades reversed
While the cause remained unknown, market officials said thousands of trades made during the plunge were being cancelled because they were "clearly erroneous." Some companies, including consulting firm Accenture, saw their share prices briefly fall to as low as a few cents.
New York Stock Exchange Euronext CEO Duncan Niederauer told CNBC that his exchange cancelled 4000 trades.
At Direct Edge, the third-largest U.S. exchange, employees worked through the night reviewing some of the 10 million trades made Thursday and found 2,000 that had to be cancelled, said chief executive William O'Brien.
BATS Global Markets, one of the largest U.S. trading networks, had to cancel 540 trades.
Nasdaq declined to give a number.
We must control these robots - Senator
Mr Dodd said his committee will hold hearings on last Thursday's events.
But he said for now the priority is for the Securities and Exchange Commission and the Commodities Futures Trading Commission to come up quickly with answers for dealing with high-frequency trading marked by a lack of marketwide circuit breakers to prevent the market from spiralling out of control.
Mr Dodd said he did not see a need for new legislation. The financial overhaul bill now being debated in the Senate does have early warning systems to detect problems such as having circuit breakers at only one exchange, he said.
"You shouldn't have a crisis like this happen before noticing that," he said.
Mr Dodd noted that the freefall on Wall Street occurred when there was good economic news: a sharp growth in jobs, particularly in the manufacturing sector. "So you are getting sort of this casino environment that's appearing in our markets," he said. "It does not reflect what's going on in the real economy."
- With AP
Share market higher on Wall St leadMarkets sift trades for clues
