Schapiro Offers Solution to Flash Crash

SEC’s Mary Schapiro carves out the single-stock circuit breaker response. “It’s an orderly, organized way to deal with this. We will add additional stocks after the pilot,” says Schapiro.


A long 16 months is how Mary Schapiro characterizes her tenure as chairman of the Securities and Exchange Commission (SEC). “The people and what we’re doing — bringing confidence and trust in the industry — makes it all worthwhile.” But as she and her agency grapple with such issues as the May 6 “flash crash,” Schapiro says she’s cognizant of the perils of regulation: setting up arbitrage opportunities in money moving to the least regulated market around the globe.

Schapiro told a packed house at the Financial Women’s Association meeting on June 14 that after last month’s 570 point slide, she brought the exchanges, the alternative trading ECNs and broker-dealer internal traders together a day later and carved out the single-stock circuit breaker response. “It’s a pilot program now that will only apply to Standard & Poor’s 500 index stocks, although we know that only 14 percent of the stocks involved in the May 6 drop were S&P stocks,” she notes. “It’s an orderly, organized way to deal with this. We will add additional stocks after the pilot.”

If a pilot stock experiences a 10 percent change in price for more than a five-minute period, trading will pause in the stock for five minutes. “Is five minutes too long to keep people from their money,” Schapiro was asked. “It’s a pilot program so we will have flexibility. There are some who think five minutes may not be long enough.”

The agency, she explains, is “fixing holes but not wanting to add new bureaucracies — we don’t want to put a crimp in markets,” Schapiro insists. “We want markets to flow freely but fairly.”

She stresses what is always topmost: the competitiveness of U.S. markets in global trading. “We want to make changes that are thoughtful and deliberative. We put rules out for public comment and we hold roundtables of experts to try to weed out any potential unforeseen consequences to investors. But our bias is to long-term investors.”

Here’s Schapiro’s take on some specifics:

* On regulating swaps desks, which represents just two of the 1,974 pages of the financial reform bill before Congress: “Do they really need to be spun off? That is one of the big questions,” she says. “What about reputational risk? Could this empower the big international firms like Deutsche Bank and HSBC to garner more business? Will it make the U.S. less competitive? As regulators we always need to be worried this way.” But she expects to see more derivatives regulations internationally and especially in Asia, as will become apparent in the G-20 talks in Toronto next week. Clarifications flowing in Congress include the idea that swaps dealing desks be spun off into separate affiliates.

* On credit-rating agencies: the Senator Al Franken amendment to the reform bill. There’s tremendous reliance on credit-rating agencies and it’s clear they didn’t perform very well. They’re using models that didn’t work with assumptions that were wrong. Schapiro says, “What’s being examined is their fundamental business structure, that ratings are issuer-paid is the wrong structure. Subscriber-based is a consideration to break the bond between ratings issuance and paying for them. The goal as I understand it is to tone down conflicts and add disclosure while prohibiting ratings shopping and conflicts of interest. Clearly, there will be more sunlight on ratings.”

* Was the lawsuit against Goldman Sachs politically charged? “There is nothing political about it, point blank,” she charged back. “We bring cases when they are ready.”

* Do you have the resources you need? “We’re at the 2005 staffing levels now in 2010, which is pretty frightening,” she notes. “Obviously, business has grown in size and complexity over these same five years. But we’ve got a new aggressiveness and we’re not afraid to delve into complex issues. We want independence of the Treasury funding, but we don’t know if we can get that.” The financial reform Senate bill floats allowing the SEC to fund itself through the fees it collects.