Financial regulators have summoned the heads of major exchanges including the New York Stock Exchange Euronext and Nasdaq OMX Group to Washington on Monday to discuss how conflicting trading rules may have contributed to Thursday's historic stock market plunge.
Securities and Exchange Commission Chairman Mary Schapiro on Friday called top executives at major financial exchanges to announce the Monday meeting, said a person familiar with the situation.
Meeting participants are expected to weigh possible solutions to reconcile the often-conflicting rules written and enforced by different exchanges, said the person, who spoke on the condition of anonymity because he was not authorized to discuss the matter publicly.
Regulators and exchanges have been poring over data from millions of trades trying to pinpoint what caused Thursday's massive, computerized sell-off, which at one point had the Dow Jones Industrial Average down by nearly 1,000 points. The Dow later recovered to close the session down 342 points. White House homeland security and counterterrorism adviser John Brennan told "Fox News Sunday" that there is no evidence that a cyber attack was behind the chaos.
The SEC is leading the investigation with the Commodity Futures Trading Commission. Those agencies are ultimately responsible for overseeing markets, but they rely heavily on exchanges to write and enforce their own rules. And the exchanges' rules vary widely.
As regulators seek to understand the root cause of Thursday's dive, they again are relying on the exchanges — this time to flag suspicious trades and help the SEC narrow the focus of its probe.
One reason: Market-wide trading data is not collected in a single location. Instead, each exchange's trades are reported to its designated self-regulator — often part of the same company that owns the exchange.
Regulators now believe the disruption was caused by a toxic, not-yet-understood, feedback loop created when multiple trading schemes interacted, according to people familiar with the situation. That contradicts earlier speculation that the trigger was a small number of erroneous trades.
That means it could take weeks to sort out the problem, said the people, who spoke on condition of anonymity because they were not authorized to discuss the investigation.
Thursday's volatility highlighted the way high-speed computerized trading can undermine efforts to take a broader view of the market.
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 U.S., and proponents say it makes the stock market run more smoothly by efficiently connecting buyers and sellers.
But on Thursday, in an effort to counteract rapid market swings, the New York Stock Exchange invoked a measure to slow down trading. Some analysts believe that drove some trades onto other electronic exchanges, leaving fewer buyers and sellers to help set prices. That means the few actors left had disproportionate effects on stock prices, feeding the volatility.
The turbulence continued Friday. Amid anxiety about the unexplained plunge and a growing debt crisis in Europe, the Dow fell as much as 280 points then climbed to positive territory briefly before closing down almost 139.
A top industry official said in a speech Friday that modern financial markets have grown so fast and are so complex that regulators must weigh new measures to help prevent events like Thursday's.
"With the huge changes in the market we need again to look at market structure," said Rick Ketchum, CEO of the Financial Industry Regulatory Authority, a private self-regulatory group that oversees the Nasdaq.
Ketchum said firms with direct market access need safety shut-off valves so they don't "continuously feed in orders" after market drops and should consider the risk of rapid liquidity problems in fast-moving markets.
"There need to be shock absorbers in the market," Ketchum said. "We can't be in this position of redesigning what happens in trades and making decisions in what trades should be broken with respect to markets that go close to zero. That isn't an acceptable place."
On Capitol Hill this week, Sens. Ted Kaufman, D-Del., and Mark Warner, D-Va., are expected to continue working with Senate Banking Committee members to insist that the SEC and the CFTC undertake a thorough study of high-frequency trading and other tools that move markets in the blink of an eye.
The measure would be part of a broad overhaul of financial regulations being debated by Congress.
On Tuesday, Rep. Paul Kanjorski, D-Pa., will hold a hearing into Thursday's market activity. A witness list has not yet been announced. Kanjorski's subcommittee — which is responsible for overseeing and crafting legislation on capital markets — hasn't held a hearing on flash trading to this point.
U.S. stock futures were rising Sunday evening as European finance ministers discussed a massive loan package designed to prevent Greece's debt crisis from spreading throughout the eurozone. Dow futures were up 165, or 1.6 percent, at 10,500. Nasdaq futures were up 30.75, or 1.7 percent, at 1,879.25; while S&P futures rose 18.80, or 1.7 percent, to 1,125.80.