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THE STOCK MARKET PLUNGE: WHAT 

HAPPENED AND WHAT IS NEXT? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MAY 11, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–133 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 11, 2010 ..................................................................................................... 1 

Appendix: 

May 11, 2010 ..................................................................................................... 67 

WITNESSES 

TUESDAY, MAY 11, 2010 

Duffy, Terrence A., Executive Chairman, CME Group Inc. ................................. 47 

Gensler, Hon. Gary, Chairman, U.S. Commodity Futures Trading Commission ........................................................................................................................ 14

Leibowitz, Larry, Chief Operating Officer, NYSE Euronext ................................ 42 

Noll, Eric, Executive Vice President, NASDAQ OMX Group, Inc. ...................... 45 

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commission, accompanied by Robert W. Cook, Director, Division of Trading and 

Markets, U.S. Securities and Exchange Commission ....................................... 12 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 68 

Duffy, Terrence A. ............................................................................................ 70 

Gensler, Hon. Gary ........................................................................................... 85 

Leibowitz, Larry ............................................................................................... 95 

Noll, Eric ........................................................................................................... 106 

Schapiro, Hon. Mary L. .................................................................................... 114 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Written statement of Bart Chilton, Commissioner, Commodity Futures 

Trading Commission ..................................................................................... 135 

Hinojosa, Hon. Ruben: 

Insert regarding establishing a joint CFTC–SEC Advisory Committee 

on Emerging Regulatory Issues ................................................................... 138 

Written responses to questions submitted to Chairman Schapiro ............... 143 

Schapiro, Hon. Mary L.: 

‘‘Preliminary Findings Regarding the Market Events of May 6, 2010— 

Report of the Staffs of the CFTC and the SEC to the Joint Advisory 

Committee on Emerging Regulatory Issues,’’ dated May 18, 2010 ........... 150 

(1) 

THE STOCK MARKET PLUNGE: WHAT 

HAPPENED AND WHAT IS NEXT? 

Tuesday, May 11, 2010 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 3 p.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Ackerman, Sherman, Capuano, Hinojosa, Miller of North Carolina, Scott, Bean, 

Klein, Perlmutter, Donnelly, Carson, Foster, Adler, Kosmas; Garrett, Lucas, Manzullo, Royce, Biggert, Capito, Hensarling, Campbell, and Neugebauer. 

Ex officio present: Representatives Frank and Bachus. 

Also present: Representative Moore of Kansas. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. Pursuant to committee rules, each side will 

have 15 minutes for opening statements. 

Without objection, all members’ openings statements will be 

made a part of the record. 

I ask unanimous consent that Congressman Moore be allowed to 

participate in today’s subcommittee hearing. Without objection, it 

is so ordered. 

Good afternoon. At today’s hearing, we will examine the frightening afternoon of May 6th, one of the most volatile trading days 

in history. Within minutes, stock market indices dropped precipitously, erasing more than $1 trillion in capitalization before recovering. While we may not yet have 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 rules 

to respond to an ever-evolving environment. Technological adVerDate Nov 24 2008 16:03 Nov 10, 2010 Jkt 058043 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\58043.TXT TERRIE
2 

vances 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 downside. 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 2 decades ago when technology constraints and growth last 

crushed the markets, automated traders today move in 

miniseconds 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 ascendency of 

computerized trading and automated exchanges in our capital markets appears to have created a plot as intriguing as ‘‘2001: A Space 

Odyssey.’’ Today, however, it is 2010, and we must figure 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 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 have 

lagged behind. We now must better integrate our markets. 

In this regard, I encourage that regulators and exchanges are already working together to adapt new rules for creating uniform 

single-stock circuit breakers and updating archaic marketwide 

trading halts. Most importantly, we must protect investors’ interests. They deserve fair and orderly markets, which 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 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 sprang back this time, the experience may prove quite different next time. A ghost-in-the-machine 

scenario in which an enormous computer selloff 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 SEC has already 

begun this process with its January concept release on market 

structure. 

3 

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, increased 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 I am eager to hear their testimony. 

I would now like to recognize the ranking member, the gentleman from New Jersey, Mr. Garrett, for 5 minutes. 

Mr. GARRETT. I thank the chairman, and I thank the witnesses. 

Yes, today’s hearing is certainly timely, given the events of the 

last week. But in retrospect, considering the work that the regulators have already been doing the last few days, it might have 

been wise to wait just a few more days to hold this hearing, to give 

our witnesses additional time to gather information more fully and 

to analyze the events of the last few weeks 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 you 

could say that this subcommittee should be conducting oversights 

of the SEC and our financial markets, I guess you would say in a 

more proactive way, rather than a reactive way. Until her recent 

testimony here with regard to the Lehman bankruptcy, Chairman 

Shapiro had testified just twice since she was sworn in. That is far 

less frequently than her peers who head other major financial regulatory agencies. Never before today has she been asked to testify 

on market structure reform, despite the SEC’s ambitious agenda in 

this area. 

So it is precisely for this reason that Ranking Member Bachus 

and I sent a letter to Chairman Frank requesting that this committee hold one or more SEC oversight hearings and to do it soon— 

4 weeks ago, we asked that. 

We stated in the letter, ‘‘It is our constitutional duty to perform 

regular oversight to allow members and the general public to determine the suitability and impact of the SEC proposals as well as 

judge the quality of the Commission’s work in furtherance of its 

congressionally 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 SEC is currently 

fulfilling all of the aspects of this mission might be said to be called 

into question during at least the events of this last week, which is 

why it is 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 

SEC’s examination overall of market structure. 

In another letter, in a comment letter on the Commission’s equity market structure concept release that I sent to Chairman 

Schapiro 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 markets strong and that change 

is not pursued purely or largely in response to any external pressures on entities.’’ 

4 

I went on to write, ‘‘As an independent, nonpartisan agency, the 

SEC has been entrusted with the responsibility to make its decisions based on objective, prudent, and disciplined analysis, and it 

is a great responsibility and requires an adherence to a balanced 

and data-driven empirical approach to ensure that regulatory efforts focus on those most productive areas.’’ 

Finally, I expressed concern in a letter that, in the concept release, the Commission’s request for comments respecting the interests 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 market structure. 

So I am hopeful that the tone of such requests are not really reflective of the SEC’s analytical framework, and would rather urge 

the Commission to consider that it should be determined that the 

additional rulemaking be required and the most successful outcome 

would be the one that benefits the synergy relationship as a whole. 

So at today’s hearing I will be as interested as everyone else to 

hear from both the SEC and the CFTC, as well as representatives 

from the 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 that something else may 

have factored into the sudden drops in the markets as well. 

I am hopeful that today’s hearing will begin to provide clarity as 

to what exactly happened, and I am also hopeful that we will begin 

to have a measured 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. If prudent steps can be taken to improve the performance of our markets, we should always take those 

and be open to new ideas, while keeping in mind throughout our 

discussion what potential negative consequences might occur due to 

any proposed reforms. 

Again, I look forward to all the witnesses’ testimony. Thank you. 

Chairman KANJORSKI. The Chair recognizes the chairman of the 

full committee, Chairman Frank, for 2 minutes. 

The CHAIRMAN. Mr. Chairman, I want to begin by congratulating 

you for having this hearing. I think the suggestion by the ranking 

member that we should have waited is clearly wrong. The American people are rightly disturbed. The world is questioning it. This 

is a very important issue. This need not be the last word. But to 

have failed to have a public hearing on these issues right away 

would have been to not have done our duty, and 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 seemed to me 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 SEC for overregulating, which is essentially what he was talking about; and 

two, that we should respect their independence. He has a right, obviously, to be concerned that the SEC is being more activist in its 

regulatory agenda than the previous Administration had been. I 

welcome that. I think that what they are doing is very appropriate, 

5 

and in fact I think hearings, with the frequency which we have had 

them, have been a useful way to do that. 

I also want to note that one of the issues we need to be addressing—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 have 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 by way of compensation. 

Finally, it is clear that we have the interaction here of some 

technical issues plus the crisis in Europe. I welcome—and here, 

again, there was a difference amongst some of us; the House Republican Conference had written to Vice President Biden telling 

him to stay out of any efforts 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, and we will obviously be looking into 

that further. 

Chairman KANJORSKI. Thank you, Chairman Frank. 

The gentleman from Alabama, Mr. Bachus, is recognized for 4 

minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. 

The American financial markets are the most modern in the 

world. They execute trades 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. In my opinion since, really, January, the SEC 

has done this. They have acted in a measured way, and I think the 

meeting yesterday was most appropriate. As the full Financial 

Services Committee 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 have done 

so appropriately. But we are here, and whether they we are here 

today or 2 days from now is, I think, probably irrelevant. 

Rational concern, rising risk, and a technically over-bought market that had raced ahead 70 percent in the past year resulted in 

a skittish 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 have all read the laundry list of what 

could have happened, what may have happened, or it could have 

been a combination of things. But I think what is 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 in individual stocks, but none as 

widespread as last Thursday. However, I think because of the dramatic and suddenness of last week’s event, there is something conVerDate Nov 24 2008 16:03 Nov 10, 2010 Jkt 058043 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\58043.TXT TERRIE
6 

structive in that, and although it undermined investor confidence, 

I think it clearly pointed out the need for action. 

In January of this year, the SEC, to its credit, voted unanimously to move forward with a broad review of equity market 

structure and issued a concept release seeking public comment on 

such issues as high-frequency trading, collocating trading terminals, dark liquidity, market quality metrics, and the fairness of the 

market structure. 

Last Thursday’s events, I believe, give the SEC the political clout 

it needs to take action to institute measures to help insulate the 

markets from what has been described as electronic meltdown, and 

I think it has brought a consensus among the exchanges. It won’t 

be a total cure, nor will there ever be, but it is a 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 and the SEC 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 will close by saying when you see the type of temporary anarchy that we witnessed last Thursday, it is appropriate to take some 

preventive measures. With our children and grandchildren, we take 

a timeout, and I think that we are establishing a procedure similar 

to that with our markets when they do lapse into what we witnessed last Thursday. It restores our children’s sanity, and I think 

these preventive measures you proposed 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 have done a commendable job. 

Chairman KANJORSKI. The gentleman’s time has expired. 

The gentleman from New York, Mr. Ackerman, is recognized for 

2 minutes. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

I have been advocating for the reinstatement of the uptick rule 

for the better part of 3 years, and for the better part of 3 years, 

critics of the uptick rule have argued that reinstating the price test 

that had been in place for 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 SEC 

regulation meant to encourage more faster trading that mandates 

electronic trades bypassing exchanges that cannot guarantee the 

investors the best price for a particular stock. 

In other words, the SEC’s regulation NMS overrode the New 

York Stock Exchange’s protection mechanisms, exacerbated a nonsensical, irrational, and arbitrary run last Thursday, a run that 

briefly wiped out $1 trillion, a run that the uptick rule would have 

prevented. 

I hate to say I told you so, so I won’t. Instead, I will say what 

I have been saying for years. I will say that the uptick rule would 

have prevented the Dow’s 1,000 point plunge last Thursday. I will 

say that investor confidence is of paramount importance to our 

7 

markets and the ability of our economy to recover from the deepest 

recession since the Great Depression. And I will say, instead, that 

in the wake of last Thursday’s events, if our regulators don’t reinstitute some type of meaningful, permanent, across-the-board 

price test similar to the uptick 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. 

Chairman KANJORSKI. Thank you very much, Mr. Ackerman. 

We now have the gentleman from California, Mr. Royce, for 3 

minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. I appreciate the time 

here. 

I am not sure the uptick rule would have done anything to stave 

this off at all. In terms of the studies I have seen—and I understand the SEC is still going to take the balance of the week to give 

us the triggering event, and I know that 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. One is 

that I think if you ask the average American investor what is important, he would say an orderly, well-functioning, trading environment. I think she or he would say that there is a little bit of apprehension in terms of what has happened in the past in the market. 

I am 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. Fortunately, at the time, the New York Stock Exchange specialists 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 has happened in the 

past, where I think investors first began to get spooked about what 

could happen in the market. Back then, of course, we only had two 

dominant centers: the New York Stock Exchange; and NASDAQ. 

Now, the SEC is looking at 40 different market centers. 

So I think as we go forward, we can look at some of the upsides 

that we have seen. The bid-ask spreads have been reduced by the 

fact that everything has sped up in the market. In some ways, the 

market is more efficient. But we know that Germany and other 

countries have looked at ways to look at individual stocks and put 

real-time circuit breakers in effect, where if those stocks drop more 

than 5 percent, you are going to have a hold; in 5 minutes, you are 

going to have a hold after that on transactions as regulators and 

market participants focus on what is afoot, in case we have 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 SEC for overregulating. I think we want the SEC to regVerDate Nov 24 2008 16:03 Nov 10, 2010 Jkt 058043 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\58043.TXT TERRIE
8 

ulate. I think my concern has been that market knowledge and experience is greatly lacking at the agency. As myself and my colleagues have said in the past, it is overlawyered at the SEC. 

We had the observations during the Bernie Madoff and the Alan 

Stanford Ponzi scheme cases, where we heard from Mr. Markopolos 

about the problems at the SEC. And we are hoping that culture 

can be changed as the SEC looks into this particular problem as 

well, and reengineering the oversight, and perhaps putting into effect better circuit breakers to handle this problem. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Royce. 

Now, we will hear from the gentleman from California, Mr. Sherman, for 2 minutes. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

I think the issue before us is, what is the social utility of highfrequency 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 shortsighted. 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 will 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 are 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? Is 

high-frequency trading a necessary part of allocating capital to real 

businesses, or is it a parasitic 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? Are 

Accenture and Procter & Gamble and 3M better off today as operating businesses because their stocks are subject to high-frequency 

trading? 

I would think that what is likely to happen is we will 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 is 

something that we might want to discourage so that real investors 

reap the profits on Wall Street. 

I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Sherman. 

The gentleman from Texas, Mr. Hensarling, for 3 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I certainly agree this is an important hearing. Any time $1 trillion of market value disappears in a matter of minutes and a lot 

of small investors are hurt, we need to have a congressional hearing. 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 

9 

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 have 

never really agreed with that particular position, although I do 

have an open mind that perhaps some reprogramming may be in 

order. Specifically, I do believe that we at least need to look and 

examine the desirability of having stock-specific circuit breakers 

across all of our markets, and certainly, there is an open question 

on the impact of canceling trades. 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 MNS, 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 Error Eyed in 

Market Selloff,’’ on May 6th: ‘‘Traders were not comforted by the 

fact that Greece seemed to be working towards a resolution of its 

debt problems. Instead, they focused 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 Nye 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 becoming Greece ourselves, 

given that the deficit has increased tenfold in just 2 years, and the 

President has put forth a budget that will triple the national debt 

in 10 years. There is fear that Greece is the preview of coming attractions to the United States, and 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. 

Chairman KANJORSKI. Thank you, Mr. Hensarling. 

We will now hear from the gentleman from Georgia, Mr. Scott, 

for 1 minute. 

Mr. SCOTT. 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, to make sure we get the 

right causes of this problem, to 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. 

10 

So it is important that we listen to you: The Securities and Exchange Commission, you have to make it work; the Commodities 

Trading Commission; NASDAQ; the Chicago Mercantile Exchange; 

and, of course, the New York Stock Exchange. 

But we have a very complex system. We have nearly 50 markets. 

We have hundreds of millions of computers that are making these 

sales in megaseconds, far outpacing our human capacity to deal 

with it. If we do get the circuit breaker concept, we have to make 

sure how that is going to work. Will it do the job? What is important here is to move carefully and thoughtfully to get the right correction to this problem. The American investors and the world investors are depending on us. 

Chairman KANJORSKI. Thank you, Mr. Scott. 

We will now hear from Mr. Perlmutter for 2 minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. I just would like to 

remind the committee and the panelists that in the financial reform bill that we passed to the Senate, 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 

SEC and other regulators to take a look at high-frequency trading 

and its impact upon the markets. The good news is, it is 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 it 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 is the real question. In the 

blink of an eye, by a mistake or by an intentional act, whatever it 

might be, boom, this country lost $1 trillion over 20 minutes. 

My friends on the other side of the aisle complain about the 

spending and all this stuff by the Obama Administration; when, because of failures in the market, because of sales and failure of the 

uptick 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 has come in, we have gained about $6.5 trillion 

back. We lost $1 trillion last Thursday, and then have gained most 

of that back. 

There has to be a real good understanding of the algorithm-driven nanotrading that we have. It has benefits, Mr. Hensarling is 

right, the liquidity that 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. 

I yield back, Mr. Chairman. 

Chairman KANJORSKI. Now, the last presenter, Mr. Foster, for 2 

minutes. 

Mr. FOSTER. Thank you. I want to thank the chairman for holding this important and timely hearing. 

As a high-energy particle physicist, I spent many years programming and debugging large systems of high-speed digital logic computers. So the fact that large interconnected processing systems, individually programmed by very smart individuals, exhibit complex 

and erratic behavior when they are simply thrown together, does 

11 

not surprise me at all. However, the fact that these complex systems are put in control of a large and important section of our 

economy, without sufficiently robust testing of their interoperability 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 indefensible, as is the absence of uniform legal clarity when it comes time 

to bust trades that have been made on a clearly erroneous basis. 

Part of the problem that we are facing is the mismatch between 

the time scales of human thought and machine action. While the 

logic of circuit breakers and market pauses to restore liquidity has 

been understood for decades, we see now that it must be implemented on a time scale of computer trading and it must be implemented uniformly across a wide variety of trading platforms. 

The race towards lower latencies and higher-speed trading shows 

no sign of abating. Startup companies are already developing trading and matching engines based not on clusters of computer servers, which will be too slow to compete, but on dedicated pipeline 

logic based on field-programmable data arrays that will typically 

perform a dedicated calculation 100 times faster than a dedicated 

computer processor. 

In particle physics, these venues for years have been used to perform specialized calculations at high speed. I have personally spent 

years using them to stabilize large numbers of particles traveling 

near light speed around the circumference of a giant particle accelerator. 

So while a market pause of 5 seconds may be appropriate to restore liquidity for today’s trading algorithms, using today’s technology, a market pause of only 50 milliseconds may be appropriate 

when the next generation of technology comes on line. We have to 

stay ahead of the technological curve and have to institutionalize 

appropriate interoperability and stability tests before new components and algorithms are brought on line. 

The reason that secondary capital markets exist is to provide a 

reliable and transparent means for investors to appropriately profit 

from their wise investments in the real economy. Events like those 

of last Thursday where $1 trillion disappeared and then reappeared in the financial markets destroys that transparency and 

destroys confidence and are simply unacceptable. 

I thank you, and I yield back the balance of my time. 

Chairman KANJORSKI. Thank you, Mr. Foster. 

Now, we will move to the panel. But I want to make an observation that the issue is not one of decline in stocks. The issue is volatility. While some stocks like Accenture fell from $40 a share to 

just pennies, others, like Sotheby’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. 

That is the reason that some 2 hours after that break, Chairman 

Schapiro, 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 would have a much more disturbed population as a result of the 

happenings on Thursday. I am happy that it does not seem to reVerDate Nov 24 2008 16:03 Nov 10, 2010 Jkt 058043 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\58043.TXT TERRIE
12 

flect that in the marketplace. But I am sure that has something 

to do with the way you and Mr. Gensler 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 on such short notice. 

Now, we are going to charge you with the opportunity within the 

next 5 minutes of reducing your statement to 5 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. 

We now would like to hear from Chairman Schapiro. 

Accompanying Chairman Schapiro is Mr. Robert W. Cook, Director of the Division of Trading and Markets, United States Securities and Exchange Commission. 

STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION, ACCOMPANIED BY ROBERT W. COOK, DIRECTOR, DIVISION OF 

TRADING AND MARKETS, U.S. SECURITIES AND EXCHANGE 

COMMISSION 

Ms. SCHAPIRO. Thank you, Mr. Chairman. I hope I won’t disappoint you. 

Chairman Kanjorski, Ranking Member Garrett, and members of 

the subcommittee, I appreciate the opportunity to testify concerning the market disruption that occurred last Thursday. As you 

mentioned, I am joined today by Robert Cook, the Director of the 

Division of Trading and Markets at the SEC, who has been deeply 

involved in the analysis of the market events. 

The sudden evaporation of meaningful prices for many major exchange-listed stocks in the middle of the trading day is unacceptable and clearly contrary to the vital policy objective of maintaining 

fair and orderly financial markets. The SEC 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 5 minutes. As quickly as the market 

dropped, it suddenly and dramatically reversed itself, recovering 

543 points in approximately 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 effected at prices 

sharply divergent from prevailing market prices. The exchanges determined to cancel any trades from 2:40 p.m. to 3:00 p.m. at prices 

60 percent away from the last trade at or before 2:40 p.m. 

Today, the SEC 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 

aspects of our market structure which may have contributed to the 

extreme volatility. 

We have made progress in our ongoing review and can provide 

some preliminary findings. 

13 

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 have 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 percent in a few minutes and then quickly recovered all of the 5 percent decline, it should be no surprise that the 

broader stock market indices showed similarly fast and similarly 

large declines and recoveries. 

Finally, at this time we have 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 SEC 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’s events could be likened to many dominos falling, 

and while we are all understandably focused on why the first domino fell, it is equally important to understand why so many others 

fell as well. I believe we will eventually pinpoint the triggering 

events, but it is fair to say that disparate exchange rules and trading conventions caused many more dominos to fall than should 

have. 

For this reason, the SEC convened a meeting yesterday with the 

leaders of six exchanges and FINRA, where we agreed to strengthen cross-market circuit breakers, 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 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 Thursday’s remarkable 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. 

14 

We have 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 minimize short-term volatility and systemic risk. We also 

formally proposed creating a large trade reporting system to enhance the Commission’s surveillance and enforcement capabilities. 

And we have 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 effective 

cross-market surveillance. This will significantly improve our ability to conduct timely and accurate trading analyses for market reconstructions and complex investigations like that which is currently underway. 

In conclusion, the SEC is making progress in its ongoing review. 

We will ultimately find the cause or causes of the disruption and 

will put in place safeguards that will help prevent the type of unusual trading 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. 

[The prepared statement of Chairman Schapiro can be found on 

page 114 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Madam Chairman. 

Next, we have the Chairman of the Commodity Futures Trading 

Commission, Chairman Gensler. 

Incidentally, Mr. Gensler, thank you very much for responding, 

too, as quickly as you did. Fortunately, I did not have to call you, 

because I did not think it stretched to the futures market. That becoming apparent, it is good that you can be here as a corollary regulator so we can get to the bottom of this. 

Mr. Gensler, you are under the same restrictions, hopefully to 

give us about a 5-minute presentation so we can get to questions. 

STATEMENT OF THE HONORABLE GARY GENSLER, CHAIRMAN, 

U.S. COMMODITY FUTURES TRADING COMMISSION 

Mr. GENSLER. Thank you, Chairman Kanjorski, Ranking Member 

Garrett, and members of the subcommittee. I am pleased to be here 

alongside SEC 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 index futures market. Stock index futures trade on centralized exchanges and they are based upon the broad market 

index. The total outstanding is about $360 billion. This compares 

to the approximately $13 trillion of the overall equity markets; 

however, stock index futures do play an integral role to the pricing 

of the overall market. The largest contract, the E-Mini S&P 500 

contract, trades on the Chicago Mercantile Exchange. It is about 80 

percent of that market, and we will focus on that a little bit in our 

testimony. 

15 

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. 

First, electronic trading systems on all of the markets for these 

contracts reject orders priced outside of a narrow band, about a 1 

percent band up or down. 

Second, the exchanges actually have maximum order sizes. Congressman Royce mentioned something from years ago, but today, 

only about a $100 million transaction can be entered. The average 

transaction, though, in the E-Mini is about $330,000 in size. 

Third, exchanges have something that limit stop-loss orders, and 

I can get more into that in the testimony. 

Fourth, they also have something which is a market pause, a 5- 

second pause if the order book gets out of balance. In fact, last 

Thursday, that 5-second pause occurred exactly when the market 

bottomed. 

In terms of the preliminary review, we are 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 are able to get that from the exchanges. I think it would be 

good, and I know the SEC is working on that, but the staffs of our 

agency, the SEC, and the exchanges have looked at it and it is a 

very ongoing process. 

Let me mention four things, though. May 6th started turbulent. 

You can think of an airplane in turbulent skies. 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 

percent interday from Wednesday to Thursday on some measures. 

Further, the futures markets and other markets are so intertwined that stock index futures looked 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, and small capitalization equity securities began declining sharply. Between 2:00 p.m. and 2:20 p.m. 

East Coast time and by 2:24 p.m. East Coast time, there were 8 

securities that were exchange-traded securities that were already 

off 50 percent in the preceding 24 minutes. 

Other price signals started to come in after 2:30 p.m.—some of 

the large markets started to delink under what is called a self-help 

program that you will hear about a little later, NASDAQ and some 

of the others. 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 market, the high-frequency traders, started to limit their 

participation around 2:42, 2:43, and so forth; and that is exactly 

when that V was happening as some people were limiting or even 

withdrawing from the market. 

Another factor, in the midst of this, one large investor executed 

a hedging transaction, a bona fide hedging transaction in the EMidi, in the size that on normal days would move through the market. It was about 9 percent of the volume during the period down 

and up. But that was also—and may have had some participation 

within this. 

16 

So between 2:40 and 2:45, the market did go down 5 additional 

points. At 2:45 and 28 seconds, this 5-second pause happened on 

the Chicago Mercantile Exchange. This was so the order book could 

get sort of rebalanced in the computer, and in fact, that was the 

bottom. The SPDR, which is the exchange-traded fund that is a security but trades in the market, bottomed 7 seconds later. The cash 

markets bottomed all in the next minute, the 2:46 minute. And 

then you saw the market move back up. 

Exchanges and market participants have asked this question 

about a ‘‘fat-finger’’ mistake. The exchanges have looked at it closely. We have 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 clearinghouses and the settlement 

and the margin posting all worked, both Thursday and Friday. So 

the plumbing or the backside of this worked. But we continue to 

review May 6th with the SEC, particularly how the S&P futures 

traded in relation to the cash market and, to the extent of that 

trading, keyed in on some of the other indices. And as Mary said 

earlier, we set up this morning a joint advisory committee that will 

be issuing a preliminary staff report early next week and hopefully 

convening that committee to actively look at recommendations. 

With that, I look forward to working with this committee and 

taking your questions. 

[The prepared statement of Chairman Gensler can be found on 

page 85 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Chairman. 

I will take the first set of questions. 

I think I heard you say, Madam Chairman, that there will be an 

answer to this within a reasonably short period of time, within a 

matter of weeks. Is that what you anticipate? 

Ms. SCHAPIRO. I didn’t actually give a timeframe. I said we will 

get to the bottom of this. I think we will be able to determine what 

the initial triggers were. That is going to take time. There were 66 

million trades on May 6th, covering 19.5 billion shares of stock. 

You think about 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 have 

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 will have any final answers. But we will. We will make 

them public. Next week, we plan to give preliminary findings to 

our new advisory group, and we will make those public at the same 

time. 

Chairman KANJORSKI. That is a very important question. In 

order to have the stability in the market, I think that we should 

not withhold anything from the public, because if we do, we are apt 

to get all the conspiracy theorists very busy and very active, and, 

as you know, you could imagine almost anything. But you cannot 

rule out any particular cause at this point; is that correct? 

Ms. SCHAPIRO. I think that is fair to say. We have not found evidence of terrorist activity. We have not found evidence of computer 

17 

hacking or a ‘‘fat finger’’ or a particular large trade that drove the 

markets initially. But we are not ruling anything out at this point. 

And that is one reason we want to make some preliminary findings 

available next week, so the public can have confidence that we are 

moving forward. 

Chairman KANJORSKI. What is the possibility that tomorrow the 

same thing could happen? 

Ms. SCHAPIRO. I have to say it is not impossible. There is no reason to expect that it would happen tomorrow. But that is one reason, with quite a sense of urgency, we brought all of the markets 

to Washington yesterday to start to work on some solutions to the 

problem, focusing in particular on stock-by-stock circuit breakers. 

Chairman KANJORSKI. So it is 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, even before we get to the 

final cause? 

Ms. SCHAPIRO. Exactly. I think it is important to understand the 

initial cause or triggering events. I think it is 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. 

Chairman KANJORSKI. I will ask this as a joint question between 

the two of you, but do you have any suspicions that it was done 

for profit or some other means by a group or conspiracy group of 

any kind, or is this just a glitch in your opinion, if you have one? 

Ms. SCHAPIRO. I don’t think we have evidence—and, of course, I 

will let Chairman Gensler speak to this as well—that this was 

done in any kind of a malicious way. I think what my inclination 

is is that we have a widely dispersed equities market in the United 

States, several members have mentioned the number of trading 

venues, and we had different rules and conventions applying in 

those different markets that allowed for activity to be transmitted 

rapidly from one place to another without everybody following the 

same protocols. 

Mr. GENSLER. We may find that there is something that our enforcement arm has to take up, and we have been very active as of 

Thursday afternoon putting out a special call under our act to large 

participants. There are about 250 participants in this E-Mini contract during the course of the critical 20 to 30 minutes. We have 

been investigating most closely the 10 largest shorts and the 10 

largest longs in that market, but we are looking at others as well. 

I think it was sort of the turbulence in the skies added with a 

lot of signals that were coming in, that markets do work on, as 

they say, fear and greed, 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 is an issue that 

we are talking about. 

Ms. SCHAPIRO. Mr. Chairman, if I may add, we have 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 granular detail. Of course, if there is anything there, we will be following up on it. 

18 

Chairman KANJORSKI. As you know, we have passed in the 

House the regulatory reform bill and it is now pending in the Senate and being acted upon. There have been some individuals, particularly some United States Senators, who have suggested that 

there may be a remedy to be had that we could include within the 

reform, regulatory reform provision. 

Do you see that as a possibility? 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? 

Ms. SCHAPIRO. 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 certain 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 is 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 may be. 

Mr. GENSLER. I would say, Mr. Chairman, I think that since 

markets are so interrelated—securities, futures, but also the overthe-counter derivatives marketplace—I think the reform this committee has moved and hopefully Congress will move on over-thecounter derivatives will give us a greater window, because right 

now, our full review is on the listed securities and, of course, the 

futures markets, but not the over-the-counter derivatives that may 

have played some role on Thursday as well. 

Chairman KANJORSKI. Thank you very much. 

Now, the gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman, and I thank the panelists again. 

Just 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 had Senator Dodd saying we need to get in place 

our bill, meaning the bill you just referenced, and have the President sign it so we can have the tools to protect our economy from 

these kind of events, sort of implying that we do need to pass that 

legislation and give you that authority. 

Then, in the same breath, he also said, ‘‘I don’t think you need 

the legislation in this area.’’ My guess is you need the regulators 

to step up and make sure that this high-frequency trading, this 

flash trading that is going on, that is something that clearly we 

ought to take a look at. 

So on the one hand, he was saying we need more statutes and 

more laws, but on the other hand, I think he recognized what you 

just said, Madam Chairman, that you have the authority in all 

these areas to address the situation. 

Ms. SCHAPIRO. 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, all the many issues we have 

raised there with respect to high-frequency trading, volatility, and 

19 

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. 

Mr. GARRETT. Let’s go to the circuit breaker situation for just a 

second. I was just in Manhattan yesterday, 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. Maybe 

you can dispel another. But will you be using your emergency authority in order to implement these rules? That will be the first 

question. 

Ms. SCHAPIRO. First of all, we don’t have final rules constructed 

yet. And, one of the reasons we brought the markets to Washington 

to discuss here in some detail and then to charge them with going 

off and coming back with recommendations 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 time for programming computer systems, and for educating other market participants with respect to 

how the rules would operate. 

Mr. GARRETT. Okay. I will just throw out—here is an easy one 

probably, as far as the rumors that are out there, is that if you 

were going to suggest circuit breakers as far as percentages of deviation of around as small as 2 percent, where some of those traders 

would say that’s just woefully too low. 

Ms. SCHAPIRO. We very much understand that issue. And that is 

why again the exchanges are really assisting with how to fine tune 

both the level of change in the stock price, over what period of 

time, whether it’s done off a rolling average or off the prior day’s 

close, and then what period of time for a pause that gives the 

human being a sufficient amount of time to make decisions that 

they need to make about whether algorithms are not operating correctly, whether there is additional liquidity that can be brought 

into the marketplace. So those are all the issues we are discussing. 

Mr. GARRETT. I thought that was a simple question. So the answer is, ‘‘maybe?’’ 

Ms. SCHAPIRO. There is complexity to it. So I can’t tell you it 

would be 2 percent over 5 minutes in price changes. We are just 

not at that point yet. 

Mr. GARRETT. Okay. Now, you also said, you all there at the 

table, have set up a joint advisory committee? I am not sure— 

Ms. SCHAPIRO. That is right. 

Mr. GARRETT. That is right, a joint advisory committee? And who 

all is on that joint advisory committee? 

Ms. SCHAPIRO. We selected people who have expertise in markets 

and market microstructure in particular. So we have two former 

CFTC Chairs: Susan Phillips, who was actually the first woman 

appointed to Chair of a financial regulatory agency at the Federal 

level by President Reagan; and Brooksley Born, also a former 

CFTC Chair. We have David Ruder, a former SEC Chair who went 

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20 

nan, the former CEO and chairman of Vanguard, a very large institutional investor. 

Mr. GARRETT. I think my time is running out. Just quickly, do 

you have any current market participants other than— 

Ms. SCHAPIRO. Actually, we have a current market regulator, 

Rick Ketchum, who spent time at both NASDAQ and the New York 

Stock Exchange. We did not want to have people who have a very 

direct vested interest in advising the Commission, although this 

group’s deliberations will be fully in public and all of our meetings 

will be public, but we tried to pick people, particularly the academics, Maureen O’Hara from Cornell, Robert Engel from NYU. 

Mr. GARRETT. It might just be good to have some of the participants who are actually involved and up-to-date— 

Ms. SCHAPIRO. They are very involved. They will present to this 

group. They will submit information to the group. 

Mr. GARRETT. One last—but you get my point on that area, my 

concern there? 

Ms. SCHAPIRO. Yes. 

Mr. GARRETT. And in the last 10 seconds here, the chairman indicated that he phoned you about 2 hours after this all occurred. 

You are now asking the participants, the regulated entities, to respond back in 24 hours from yesterday. One of the questions I had 

over what happened yesterday is, if Congress could call you within 

2 hours to begin the process to find out what’s going on, did you 

have the authority actually to e-mail out immediately to all 40 or 

50 entities and say, we want to have an answer back from you just 

like you did yesterday from them? 

Ms. SCHAPIRO. 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. 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 that we could think 

through what the issues were and how we might best solve them 

as a group. 

Mr. GENSLER. And we, too, were talking directly to our exchanges by 1 a.m., which, I guess, would have been Thursday 

night. On Friday, we had our first memo from the Chicago Mercantile Exchange analyzing this contract. We had the entire data 

set loaded into our computers by 9:30 Friday morning. 

Mr. GARRETT. Okay. I appreciate that. 

Chairman KANJORSKI. The gentleman’s time has expired. 

Now, we will hear from the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

Volatility leads to perceived risk. Perceived risk leads to higher 

cost of capital for real businesses in the real America. If we had 

markets in which all the profits accrued to real investors, I think 

that would be appealing to those making real investments in real 

American companies. In contrast, a market in which Procter & 

21 

Gamble can drop to 1 cent is not appealing to those who want to 

provide real capital to real companies. 

Most of the testimony here simply assumes that we are going to 

let people keep doing what they are doing unlimited and untaxed 

and we are going to patch up the system in the hope that it won’t 

happen again. This is like the reaction if we had an unplanned explosion of nitroglycerin. If that explosion took place in a mining operation or something else socially useful, we would say, let’s have 

better regulations so that we can get that social utility of the nitroglycerin without having it explode in an unplanned way. But if this 

inherently risky nitroglycerin had an unplanned explosion because 

kids or gamblers were playing with it, we might instead say, how 

can we somewhat reduce the risk of an inherently risky activity? 

We would ask, why are we allowing this activity to take place? So 

it raises the question of whether high-frequency trading serves a 

social purpose. 

Imagine—Chairman Schapiro, imagine if somehow by magic we 

created a world in which those investing in U.S. stocks actually 

held them for a couple of hours before they sold them or went short 

for a couple of hours before they covered, and let’s say that applied 

to Procter & Gamble or 3M. How would the employees of Procter 

& Gamble or 3M—what catastrophe would they face if the stocks 

of their companies were not subject to high-frequency trading? 

Would that help those employees in those operating companies, or 

would there be some cataclysmic problem if high-frequency trading 

did not apply to those companies? 

Ms. SCHAPIRO. Congressman, let me first of all agree that the 

purpose of our capital markets is to help companies raise capital 

to create jobs, to help our economy grow, and that investors who 

commit their capital to those markets get to share economically in 

that growth and development. We have lots of questions about 

high-frequency trading and its role in our capital markets. It’s one 

reason we have exposed many of the issues related to high-frequency trading for public comment and— 

Mr. SHERMAN. Madam Chairman, I know you have many questions. I have one question, and it is my time. What catastrophe 

would occur to the employees of Procter & Gamble if the stock of 

that company was not subject to high-frequency trading? 

Ms. SCHAPIRO. I don’t know that any catastrophe would. There 

are those who will argue perhaps on the next panel that high-frequency trading adds significant liquidity in the marketplace so that 

when those Procter & Gamble employees want to sell, it is easier 

for them to do that. 

Mr. SHERMAN. Now, to what extent do you agree with the view 

that those high-frequency traders are just parasites on the market? 

You have a market in which real investors are buying and selling 

and then people come into that market and grab a little piece of 

the profit for themselves who are not engaged in real investing. 

Ms. SCHAPIRO. I guess I can’t really answer that question. 

Mr. SHERMAN. So they may be parasites; they may not be. And 

I will ask you to answer that for the record because I am going to 

go on to the next question. Would a tax of 1/20 of 1 cent per $1,000 

be sufficient to disrupt the business model of those who are enVerDate Nov 24 2008 16:03 Nov 10, 2010 Jkt 058043 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\58043.TXT TERRIE
22 

gaged in high-frequency trading so that they would substantially 

diminish the amount of high-frequency trading? 

Ms. SCHAPIRO. I honestly don’t know the answer to that question; 

so I will be happy to think through and— 

Mr. SHERMAN. I will ask you to think it through, and then we 

will have the argument that if we don’t have the casinos on our 

Main Street so they will play the casinos in Monte Carlo, but I 

would say that if all the American markets trading American 

stocks were insulated from most of this high-frequency trading that 

is where real investors would want to go, and if over in Dubai, 

somebody wants to bet for a millisecond on what happens on the 

U.S. markets, at least it is not American minds, American computers, or the American markets put at risk. And I believe my time 

has expired. 

Chairman KANJORSKI. Thank you very much, Mr. Sherman. 

Now, we will hear from the gentleman from Alabama, the ranking member of the full committee, Mr. Bachus. 

Mr. BACHUS. Thank you, Mr. Chairman. 

When the steam engine came along, it hit a lot of livestock and 

a lot of the farmers thought that they should probably do away 

with the steam engine. It also set fire to some of the fields. But 

we figured out some preventative measures, and we have done 

okay with it. Of course, it was replaced by the diesel engine, and 

a lot of people thought that was a setback. I kind of think highfrequency is not such a bad thing. 

As I said in my opening statement, you identified some of these 

problems back in January and started asking for public comment, 

which is what we have always heard you to do. So I think you have 

your hands around the problem. How do you—we have gone from 

a highly structured duopoly, NASDAQ, not with options, but with 

NASDAQ and the New York Stock Exchange. The 40 or now what 

I am now hearing 50 different trading platforms. How do you ensure the integrity of the markets price discovery without hurting 

competition and without degrading those individual models which 

all have their strengths and weaknesses. So I would ask both 

chairmen. 

Ms. SCHAPIRO. It is a great question because there are clearly 

challenges associated with our highly automated and highly disbursed and fragmented marketplace. And I think the way we ensure integrity is to have those markets linked so investors’ orders 

get the best execution that they can, and that is a requirement 

under Regulation NMS. But looking forward what we have to do 

is make sure that the markets are operating under basically the 

same rules so that an investor is not disadvantaged by trading the 

same stock in different venues. They should be able to get the best 

price wherever they are. And I think the issues that are highlighted by Thursday, many of them are addressed—not solved but 

addressed well by the creation of single stock circuit breakers that 

would allow for the times when the technology gets ahead of the 

people by too much, to take a time out and refresh the marketplace. But we have raised so many of these issues in our market 

structure concept release because we really do want to explore 

them in a thoughtful way. 

23 

While we do that, there are some short-term things I think are 

very important for us to do. The circuit breakers are among those. 

Dealing with direct access by customers into the exchanges is 

something I think we need to deal with and some issues around 

dark pools of liquidity and the use of flash orders and others, all 

of which we have under consideration right now. 

Mr. GENSLER. And I just think that—although it is outside of my 

lane a bit, that it is really important that those 40 or so venues, 

and it may be 70 in the future, have consistent transparent rules 

that are available to the public. If there is a timeout or a pause, 

whether it is 5 seconds, milliseconds, or a minute, that it be consistently applied. If you go dark on a stock somewhere, you go dark 

elsewhere. You even do it in single stock futures where we co-regulate and so forth. 

Mr. BACHUS. And I commend you. I used the word ‘‘address’’ not 

‘‘solve’’ in my opening statement too, because I think we are trying 

to address them but you never quite solve all the problems. I also 

believe—and both you and your statements, and Chairman 

Gensler, you mentioned that there is already a lot of skittishness 

in the market, a lot of increased volatility. People are on the edge 

of their chairs anyway. So obviously, as I said, it created an environment. Do you think we could find—and I suspect that there is 

not one contributing cause of this, that it was probably a combination. Now, you could have had a large trade in the S&P 500 SPDRs 

and you could point to that as possibly a part of it, but that doesn’t 

mean that wasn’t a legitimate hedging to buy. 

Mr. GENSLER. Right. I think, Congressman, in our capital markets there’s not one king or one czar or something. It is diverse. 

That is in a sense the beauty of markets. But I think that this was 

a very turbulent time. I think there were a lot of price signals by 

2:00 to 2:30 that were going negative. If it was an airplane analogy, 

you had the indicator lights now sending charges back. You also 

had one of the engines start to not run too well because liquidity 

was stepping out of the market. We did see by 2:40, 2:42 a number 

of active market makers, even these high-frequency traders were 

limiting their capacity. The major exchanges have said their order 

books seemed thinner. That means there were less bidders in it. In 

addition to that, you had a little extra cargo, this bona fide hedging 

program. It was only 9 percent of the E-mini, but it may have had 

some factor in this. 

Mr. BACHUS. I know the SEC has addressed at least dark liquidity as part of their concept. Do you have any comment, Chairman 

Schapiro? 

Ms. SCHAPIRO. The only thing I might add to the scenario that 

Chairman Gensler ran through is we also saw, because of the 

skittishness in the market, I think, a lot of stop-loss orders had 

been entered by investors hoping to limit their losses. Those were 

run through, and as a result, the market continued to drive down. 

So one of the things we want to look at is the use of stop-loss 

orders and the use of market orders, which get you a fast execution, but maybe at a really terrible price, along the lines of the 

chairman’s comments at the very beginning. So those are two other 

areas. 

24 

Mr. BACHUS. It seems there should have been some obligation by the brokers not to execute an order on a $30 stock at a penny. That 

is just good—I think that is a fiduciary relationship. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. The gentleman’s time has expired. 

Now, we will hear from the gentleman from Texas, Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Mr. Chairman. Thank you for having 

this hearing. 

Before I make a statement and ask some questions, I ask unanimous consent to enter into the record the Joint CFTC and SEC Advisory Committee on Emerging Regulatory Issues, dated May 10, 

2010. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. HINOJOSA. Thank you. 

I agree with my colleagues on both sides of the aisle that the 

Dow Jones Industrial Average plummeting 990 points, losing 22 

percent of its total value cost caused a great deal of concern for 

those of us on the House Floor that Thursday afternoon. The S&P 

500 dropped 20 percent, falling from 282 to 225 points, and this 

was the greatest loss Wall Street had ever received on a single day. 

I want to ask a question first of Chairman Schapiro. Was market 

fragmentation a key cause of last week’s 990 point drop in the Dow 

Jones index? 

Ms. SCHAPIRO. Congressman, I don’t think there is any question 

that the fact that we have a highly fragmented market is a contributing factor here and creates challenges. It doesn’t have to be the 

result that we had last Thursday if the markets, while dispersed 

and many of them, play by the same rules and have the same trading convention, so that if all of the markets are subject to halting 

trading in a stock when it reaches a certain price, then I think we 

would not have had some of the fallout that we had last week. 

Mr. HINOJOSA. Having a Brady Commission which has made lots 

of recommendations, tell me, have any of those recommendations 

been put into effect? 

Ms. SCHAPIRO. Oh, yes. The actual marketwide circuit breakers 

that exist today were a direct result of the Brady Commission’s report in January of 1988. One of the things we are also looking at 

jointly between the two agencies is whether those marketwide circuit breakers that have the market shutting for brief periods of 

time when the DOW goes down 10, 20, and at 30 percent shutting 

completely need to be updated and modernized, and that is an effort we are undergoing right now. 

Mr. HINOJOSA. So if you could tell me the similarities then of 

that October 19, 1987, market crash and give me the similarities, 

and is that being investigated so, as you said, that it not happen 

again? 

Ms. SCHAPIRO. Absolutely. If you look—I actually went back and 

looked at the Brady Commission report over the weekend and it is 

interesting that their findings are that there were multiple events 

that caused the market to decline—I believe it was 26 percent in 

October of 1987 on that day. And that is similar, I think, to what 

we will ultimately find here, that there were multiple contributing 

events. The difference is that trading largely took place at that 

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25 

change. There were not multiple trading venues, although there 

was trading in the futures markets that was delinked from the 

trading in the equity market. 

The delinkage issue exists today among the equity market. So we 

see another similarity there. We are trying to do the same careful 

and thoughtful review of the events that we expect will lead us to 

some kind of recommendations that, while not the same as the 

Brady Commission, are similar in that they lead us to further 

elaboration on circuit breakers, for example, or order types that we 

might want to limit going forward. 

Mr. GENSLER. I would say one thing, that 23—and I remember 

because I was back then in a financial firm—I think one thing is 

that 23 years ago, though there were computers back then, there 

was nothing like what we have now, and this whole concept of 

trading in nanoseconds and microseconds and automated traders. 

That is why both of our agencies have active reviews of high-frequency traders that includes looking at issues of co-location, where 

they put the 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 these high-frequency traders. That is 

something really new in this market environment from 23 years 

ago. 

Mr. HINOJOSA. Chairman Gensler, let me ask you a question, 

then, with that comparison you just gave. We need the SEC and 

your group, the CFTC, to step up to the plate and ensure that such 

market disruptions don’t occur in the future. Do you have enough 

funding and authority to prevent such an event from reoccurring? 

Mr. GENSLER. I thank you for that. We are a sorely underfunded 

agency and actually shrunk about 23 percent in the 8 years before 

this Administration. With Congress’ help, we are back to just about 

the size of we were 10 years ago, and we have put in a request, 

particularly if over-the-counter derivatives reform came into being 

to grow significantly from where we are. We do need more enforcement lawyers, cops on the beat, and we need more computer systems to try to stay up with the automated surveillance that we 

need of these markets. 

Mr. HINOJOSA. Do you leave it to—I think my time has been exhausted, and I thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you. 

Next, we will hear from the gentleman from California, Mr. 

Royce, for 5 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. I think it was a London 

economist who wrote—gave us a British perspective. They said 

when Congress doesn’t understand or like something like work or 

investment, Congress has a tendency to further tax it or legislate 

it out of existence, and I was reminded about that when the legislation was referenced earlier. And I wanted to ask Chairman 

Schapiro—there is legislation here in Congress for a transaction 

tax on every financial transaction, and I was going to ask you, is 

the solution to slow our markets through this transaction tax on 

financial transactions, or is the solution to speed up our protections 

through real-time circuit breakers? I had mentioned earlier in my 

opening remarks the concept that Germany has employed with respect to looking at individual stocks. 

26 

If individual stocks fall more than 5 percent in 5 minutes, then 

you have those circuit breakers go into effect until the markets 

have sorted it out. And it just seems to me that if we put this 

transaction tax on trading, what we are really going to do is provide less liquidity, and I wanted to ask if that is a valid concern 

there and your thoughts. 

Ms. SCHAPIRO. Let me, say I have studied the Deutsche Borse individual stock mechanism, and it informed very much our conversation that we had with the exchanges yesterday because my 

personal view is that if we can do circuit breakers on individual 

stocks, depending upon the velocity with which they are declining 

in value, it will allow us to take a timeout for some period of time, 

and that every market must honor that timeout, we will have done 

a lot to make a difference here. 

And I think it is important for us to do that in relatively short 

order. I guess tax policy is way beyond my pay grade and really 

my depth, but I don’t—I just don’t have a view, I guess, about 

whether imposing a transaction tax would be an effective mechanism to slow the market or not. I don’t know what the impact necessarily would be on high-frequency or algorithmic traders. 

Mr. ROYCE. My colleagues have brought it up on the other side 

of the aisle, so I thought I would pursue that. But let me ask you 

another question and that goes to the events on Thursday. Does 

this situation justify looking at trying to put all of the markets 

under one regulator? You have equities, options, future markets— 

they are all interconnected. They are all correlated against each 

other. And we passed a regulatory reform bill out of the House last 

year which I think moves us in the right direction, but you still 

have two separate agencies with two separate sets of rules, and I 

just think about some of the studies that I have seen where whether you are liberal or conservative or in the center, these think 

tanks and economists that have looked at this have all asked the 

question, if you have the same entities trading the same products 

but two different regulators with two different sets of rules, aren’t 

you compounding the difficulty here and isn’t this simply the result 

of not being able to move forward with real world-class regulation? 

So I would like to ask you, Chairman Schapiro, for your view on 

that. 

Ms. SCHAPIRO. Certainly. Let me just say that the SEC does have 

jurisdiction over all of the equity and options markets; we don’t 

over the future markets. And I know Chairman Gensler has heard 

me say this before, that I think if we were writing on a clean slate, 

we would not create the regulatory structure around these instruments or these market participants that we have today and that 

there would be efficiencies gained by merger of the two agencies. 

But I want to hasten to add that I—and I was CFTC Chairman 

quite a few years ago and I have been around both agencies for 

many years. Never in the history of either of those agencies have 

I seen closer collaboration or cooperation or willingness to support 

each other as we try to get done these things that we think are important in each of our marketplaces. So while we don’t have a 

merged agency, I think we have very—the next best— 

Mr. ROYCE. Very good. Let me quickly ask you my last question: 

Is there any evidence that the uptick rule would have prevented 

27 

this calamity on Thursday? I recall reading an SEC study which 

said that there’s no way that the uptick rule in today’s markets 

could be of assistance, but what is your view on that? 

Ms. SCHAPIRO. As you know, we did pass a new version of the 

uptick rule, a short sale circuit breaker rule that is not in effect 

yet, and won’t be until November. It is possible new rules may 

have helped to the extent short sellers were active during this time 

period, but what we actually understand is that the level of short 

selling as a percentage of trading volume during that critical 30 

minutes from 2:30 to 3:00 was lower than it was at other times 

during the day. So to the extent the sales we saw were long sales, 

the uptick rule would not have made a difference. 

Mr. ROYCE. So it really seemed to be a lack of liquidity problem? 

Ms. SCHAPIRO. To the extent they were short sales and probably 

something we are looking at, it might have made—it might have 

had some impact. 

Mr. ROYCE. Thank you very much. 

Chairman KANJORSKI. Thank you very much, Mr. Royce. 

And now, the gentleman from North Carolina, Mr. Miller, for 5 

minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

I assume that the value to our economy of securities markets is 

that it matches people with money to invest with people who can 

put the money to productive use, and the usual justification for 

high-frequency trading is that it adds to liquidity. And I could understand, for instance, that someone who thought they might buy 

a house for an investment but might need to sell it would be reluctant to buy a house because they might have trouble selling. But 

I really don’t think, before high-frequency trading, that there was 

that much difficulty in unloading a stock. 

Is there any evidence that people are more willing to invest in 

stocks now because of increased liquidity, that people who really 

want to buy and hold a stock who actually want to own the company? 

Ms. SCHAPIRO. I don’t want to dodge your question, but I do want 

to say this is exactly the kind of issues we are looking at in our 

high-frequency trading release, the issues that we published for 

public comment and public dialogue. And we want to understand, 

what is the role of high-frequency trading? Is there a benefit to our 

marketplace? Are the interests of high-frequency trading aligned 

with long-term investors or are they at odds with long-term investors? And if so, because our markets serve the purpose of, just as 

you say, allocating capital to useful endeavors and to creating jobs, 

we want to make sure nothing is detracting from that. So we are 

doing a very deep dive. The comment period just closed about 2 

weeks ago, and we are working through those issues now. 

Mr. MILLER OF NORTH CAROLINA. A stunning number of trades 

are announced every day. Is there any reason to think—and I know 

that you are still in the middle of this—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 of 

hours or less. 

28 

Ms. SCHAPIRO. I don’t know the answer to that offhand, but I 

would love to have some research done and see if we could provide 

you with more detail. There are—just on this 1 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, but I 

would like to see if we could get one for you. 

Mr. MILLER OF NORTH CAROLINA. The statistics or the estimates 

that I have seen are that 40 to 70 percent of all trades are highfrequency trading. Is that roughly correct? 

Ms. SCHAPIRO. Yes. We have heard those numbers as high as 70 

percent. 

Mr. MILLER OF NORTH CAROLINA. Okay. Jon Stewart had a piece 

the other night showing the number of times that 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 this completely unpredictable combination of events that maybe happens every 100 years. 

They seem to happen every couple of weeks. In looking at what 

happened, can you also look at what else—it seems unlikely that 

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? 

Ms. SCHAPIRO. Absolutely, and that is part of our broader market 

structure review that we are doing. 

Mr. MILLER OF NORTH CAROLINA. Okay. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Miller. 

The gentleman from Oklahoma, Mr. Lucas. 

Mr. LUCAS. 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 in my role as ranking member of the Agriculture Committee. 

You mentioned earlier in one of your comments in reference to 

last week that derivatives may have played a role. Chairman 

Gensler, is that a hunch? Is that a gut feeling? Or is that something you potentially see in all those reams of data you are working 

through now? 

Mr. GENSLER. There are derivatives that are on exchange, futures, and we can see that data. I think my earlier comment was 

just 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 that 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. 

Mr. LUCAS. Along that line, Mr. Chairman, you have always been 

a very vocal supporter of the mandatory exchange trading for derivatives that 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 

29 

sensible route to go for over-the-counter derivatives, which are very 

illiquid instruments? And thinking about that reduced volume and 

reduced liquidity, if there is a wild action or an aberrant trade, 

isn’t the potential far more damaging? 

Mr. GENSLER. I appreciate the question. I very much still am. I 

think that the over-the-counter derivatives market, which dwarfs 

the future exchange derivatives market by about 8 to 10 times the 

size, no small amount, I think we must bring the transparency 

there. Not for all contracts, however. There will be a whole group 

of contracts that are customized. There will be a whole group that 

aren’t listed, even if they are clearable. But I think that for the 

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 lower transaction, then it is just reported 

afterwards, just as it is in the futures and securities markets now, 

but I think that 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. 

Mr. LUCAS. So ultimately, when you do and your good folks over 

there and your friends at the SEC grind through all of this and 

come up with some sort of a determination, we will have a much 

better feel. I just personally still have to believe that having 

watched what the Agriculture Committee did and working in conjunction with Financial Services, trying to be a bit more flexible, 

a bit more rational in how we handle these derivatives, I personally think was the route to go. I know ultimately after last week, 

we will 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 mystery key stroke, 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. 

Mr. GENSLER. And that is why I think it is not only important 

that we have strong risk management in the clearinghouses that 

the Congress has been supportive of, but also that these exchanges 

for derivatives have very strong rules. I think the futures market 

has some very important guidance, the four that I have mentioned 

earlier in terms of not being able to put prices in in the outset of 

a ban; and having the pause, the 5-second pause that happened in 

the futures market last Thursday was, in fact, right at the bottom 

where the order book got refilled. And the mention that Chairman 

Schapiro was talking about of trying to do that across the securities markets, I support her initiative on that. 

Mr. LUCAS. One last brief question. If indeed we do determine 

what happened, what the odds that it will be something of a proprietary nature where you won’t be able to share that with all of 

us and the public? 

Mr. GENSLER. We plan to make our findings public both to Congress and this committee. Next week will just be initial findings of 

staff. If there was a need to talk about individual trading, informaVerDate Nov 24 2008 16:03 Nov 10, 2010 Jkt 058043 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\58043.TXT TERRIE
30 

tion of individual accounts, than we would work with this committee to do that in the appropriate setting. 

Mr. LUCAS. I look forward to letting the chips fall where they 

may. Thank you. 

I yield back, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Lucas. 

And now, we will here from the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

First, let me commend you, Chairman Schapiro and Chairman 

Gensler. Your presentation certainly gives us all confidence that 

you have your hands around the problem. While you are looking for 

the causes, you have certainly shown that you have put certain 

measures in place to give confidence to investors to keep on investing with confidence. It seems to me though that what we really 

have here is a way we are trying to find to stop a freefall in a free 

market in a free economy while it is very important to keep the 

markets free. That is the strength of our markets, the freedom. So 

as we move with controls, my question has to evolve around this 

element that you are presenting as the most basic means of controlling this free market so at the same time making sure it is still 

free to function in the beauty and the strength that it has. And 

your instrument for doing this apparently is the circuit breaker. 

And the circuit breaker basically is a function of time increments. It is a function of pricing. And I wonder, how would you determine that? Who will determine that? Will it be an increment of 

15 minutes if it goes down 5 percent, or would it be 2 or 3 hours 

if it goes down 10 or 20 percent? And will it apply across each exchange? We have seven of those operative. Or would it apply just 

to individual stocks? How simply would that circuit breaker work 

and allow still for the freedom of trading? 

Ms. SCHAPIRO. Congressman, that is a great question. And I 

think it is 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, and 500 points in a matter of a couple of minutes, that the real forces of supply and demand were operating. We 

clearly had a problem that was related to the fact, in my view, that 

we had markets operating under different sets of rules. 

We also had some 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 are talking about with the exchanges would be designed based on longtime experience in other 

markets around the world which already have circuit breakers on 

a stock-by-stock basis as well as the experience of, for example the 

New York Stock Exchange which already has the equivalent of a 

circuit breaker, which I am sure they will talk about in their testimony in the next panel. Bringing in collective experience of all 

those markets together with the ultimate approval of the SEC for 

any rules that would institute circuit breakers, I think gives us 

31 

some confidence that we will be able to get it right, and if we don’t, 

we will have to revisit it and make adjustments. 

On a marketwide circuit breaker, as we have in our markets 

today that applies across the equities options and futures markets, 

both the SEC and the CFTC would ultimately decide whether 

changes to those existing circuit breakers are appropriate. 

Mr. SCOTT. Part of the problem is the lack of uniformity across 

the markets. 

Ms. SCHAPIRO. Absolutely. 

Mr. SCOTT. So who in your estimation would be the entity that 

would make that determination at the particular time that circuit 

breaker goes into effect? 

Ms. SCHAPIRO. There are two ways to do it, and the way I favor, 

quite honestly, is 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 percent in 5 minutes that the market for that stock 

will be shut at every place it trades for a period of 3 minutes or 

5 minutes or whatever is appropriate. The certainty of knowing 

ahead of time, I think, is of enormous benefit to markets because 

they thrive on that kind of certainty about what the rules would 

do. 

Another way to do it would be to allow a listing market, so if it 

is a New York Stock Exchange stock for the New York Stock Exchange, to be able to say that we are shutting down or we are 

going into slow mode or we are turning off the electronic systems 

for 1 minute in this stock and all other markets would have to follow if that doesn’t provide all of the upfront certainty that we get 

from circuit breaker. 

Mr. SCOTT. Let me just ask, since my time is up, would this circuit breaker also work for a dramatic rise in price of stock as well 

as a lowering? 

Ms. SCHAPIRO. There seems to be less appetite, I will say, for circuit breakers on the upside. 

Mr. SCOTT. And if you had your druthers, would we have one 

centralized entity for determining when the circuit breaker goes, or 

would you recommend that each of the major exchanges have their 

own individual and that reaction sets in for the others? 

Ms. SCHAPIRO. I think there has to be a minimum circuit breaker 

that applies across every market that trades for whatever the stock 

is or we will have exactly the problem that we had on Thursday. 

Mr. SCOTT. Okay. Thank you, Mr. Chairman. 

Chairman KANJORSKI. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I have been here since the hearing was gaveled into order and 

noticing the title of our hearing, ‘‘What Happened and What is 

Next?’’, I don’t think I have heard what has happened, but I have 

heard a lot of debate about what is next, and I somewhat question 

the wisdom of debating what is next when we don’t know what 

happened. Perhaps I missed something, but I think—Chairman 

Schapiro, I believe I heard you say that you are working around 

the clock to find the cause, but you don’t have an answer today; 

is that a fair paraphrase of what you said? 

Ms. SCHAPIRO. That is fair. 

32 

Mr. HENSARLING. And that you will share the trigger as identified with the public when you identify the trigger? 

Ms. SCHAPIRO. As we—trigger or triggers— 

Mr. HENSARLING. Trigger or triggers. 

Ms. SCHAPIRO. When we understand what the cause is, we will 

absolutely share it with the public. 

Mr. HENSARLING. Okay. And Chairman Gensler, I think I heard 

you say something similar, that your people are diligently fact-finding at this point, but you are not prepared to announce a cause 

of— 

Mr. GENSLER. I would say that I think that the four factors I 

mentioned contributed to the turbulent market—we are continuing 

to research to see if there is a fifth or a sixth (and so forth) factor 

but the four factors I mentioned, the turbulent environment that 

this—the market—if I can use the airplane analogy, there were a 

lot of signaling advices. When market participants start to see bad 

signaling, they start to sell. They start to lay off risk, if I can use 

an old market term. 

Third, there were some active traders providing liquidity stepping back from the market. I think there will probably be others 

that we will find as we do more research. And we were saying in 

a down market, we need to hedge. We need to put on bona fide 

hedges. 

Mr. HENSARLING. So is it fair to say then that certainly you have 

localized individual factors worthy of further research, but you still 

have yet to draw the conclusion as to the trigger for this incredible 

violent market volatility? 

Mr. GENSLER. I think we will have staff report preliminary findings next week that will have more in them. However, there is a 

factor that I think we have definitely identified, which is across the 

securities markets that individual securities trading down to a 

penny a share, if I can swim outside my lane, as Chairman 

Schapiro said—really is not acceptable in the capital markets when 

they were tracking moments before at $40. That is something— 

that cross-market pauses or circuit breakers is about. 

Mr. HENSARLING. I certainly agree, Mr. Chairman. It seems like, 

to some extent, the hearing is concentrated less on perhaps what 

is the underlying cause and is kind of turning into a debate of 

high-frequency trading, its relative benefits or relative cost. I have 

in my hand an editorial that was written, Chairman Schapiro, by 

one of your predecessors, Arthur Levitt, that appeared in The Wall 

Street Journal about 8 or 9 months ago. In the editorial, he posits, 

‘‘Due to the rise of high-frequency trading, investors, both large 

and small, enjoy a deeper pool of potential buyers and sellers and 

a wider variety of ways to execute trades.’’ He went on in this editorial to write, ‘‘Choice abounds and investors now enjoy faster, 

more reliable execution technology and lower execution fees than 

ever before. All of that contributes significantly to market liquidity, 

a critical measure of market health and something all investors 

value.’’ 

Do you have a comment on your predecessor’s thoughts? 

Ms. SCHAPIRO. I do think investors have a lot of choices today. 

I think that is generally a good thing. I do think that they benefit 

from narrower spreads and lower costs as a result of competition 

33 

in our marketplace. But I also don’t think they benefit from the 

kind of conduct that happened on Thursday where, in part because 

of disparate rules across marketplaces, investor orders were treated 

very differently and we had the phenomenon of a stock at $40 

trade at a penny. 

And so while we don’t know all the causes of the volatility, we 

do know what some of the symptoms were, and we can go ahead 

and tackle those, I think, understanding that we want to be cautious, we want to be thoughtful. We don’t want to harm what is 

good about our markets. But I also think we run the risk of losing 

investor confidence if we don’t move forward to fix some of the 

things that we believe and the exchanges believe are problems. 

Mr. HENSARLING. If I could, Chairman Schapiro, have you comment on another part of his editorial dealing with the suggested 25 

basis points per trade tax on all trades. Chairman Levitt said, 

‘‘Such a tax has been tried before from 1914 to 1966. There is a 

transfer tax set at .2 percent of stock trades. That expense was 

simply passed on to investors. A tax on such transactions would 

probably drive high-frequency traders and the liquidity they bring 

to foreign markets.’’ I know you didn’t want to get dragged into tax 

policy, but do you have an empirical observation on whether or not 

historically such taxes have been passed on to investors? 

Ms. SCHAPIRO. I really don’t know the answer to that. I assume 

most costs are passed on to investors one way or another. 

Mr. HENSARLING. I agree. Thank you for your time. 

I yield back, Mr. Chairman. 

Chairman KANJORSKI. The gentleman’s time has expired. 

Now, we will hear from the gentlewoman from Illinois, Ms. Bean. 

Ms. BEAN. Thank you, Mr. Chairman. And thank you, Chairmen 

Schapiro and Gensler, and Director Cook, for your testimony today. 

In the Wall Street reforms that we have already passed in the 

House and are pending in the Senate, an amendment that I authored and was included will require evaluation by the oversight 

camp council, the systemic risk council, to evaluate—identify and 

evaluate potential threats to the stability of the financial system. 

It would also require that they establish plans and conduct exercises in the same way that the Department of Homeland Security 

and other agencies do to potentially avoid or respond to or contain 

emergencies that would happen. And then they will provide a report back to Congress on the results of what they have anticipated 

and what they have discovered. 

My question to both the chairmen is, the functional regulators 

such as yourselves already have the authority to do those types of 

exercises and plan ahead for eventualities, however slight you 

think the probability. Can you share with me in terms of those 

types of exercises reports and plans what had been done prior to 

May 6th in each of your organizations? I will start with Chairman 

Schapiro. 

Ms. SCHAPIRO. Sure. And I may ask Mr. Cook to jump in here, 

because we do something called an ARP, an automation review policy examination, of all of our regulated markets to test the quality 

of their systems, the security of their systems, the robustness and 

the resiliency of their systems and their backups, and that is a routine program we engage in regularly. We are also gathering data, 

34 

as I have said, probably 300 times here and everyone is tired of 

hearing, through our market structure concept release on issues 

that will relate in some part to systems and particularly the impact 

of strategies that are utilized by algorithmic traders and high-frequency traders on quality and the integrity of our markets. 

Ms. BEAN. Chairman Gensler? 

Mr. GENSLER. We are fortunate to be able to get the position 

data every day, so what we got last week was not unusual because 

under our statute, we are able to get the whole set every day. 

Every Friday, the five commissioners sit in a room and get a surveillance brief on the activities of that marketplace for that week. 

Then, we also look at over the next week as to how the futures 

market is coming together. So we do it on a real-time basis week 

to week in terms of our surveillance in the markets. In terms of 

last Thursday, if I might say, Secretary Geithner had us and the 

whole President’s working group together—I think it was a 4:15 

call. 

I can’t remember the evening call we had. The first thing Friday 

morning again, and maybe there was a second one Friday. I can’t 

recall. So the President’s working group may sort of mutate into 

this council in a sense. But, there was a very active cross-governmental collaboration Thursday evening, Friday, and over the weekend. 

Ms. BEAN. Thank you. Director Cook, did you want to add anything further? No? 

I guess my question would then be, moving forward, do you anticipate further rigorous planning, out-of-the-box thinking about potential scenarios that you may not have otherwise anticipated? 

Ms. SCHAPIRO. Absolutely. And one of the reasons we proposed 

just a couple of weeks ago a large trader reporting system, which 

exists on the CFTC side—I recall it from my days there—on the 

equity side so that we can actually identify much more quickly the 

activity of high-frequency traders in the markets on a routine 

basis. And we are—the Commission will vote in about 2 weeks on 

the proposal to create a consolidated audit trail so that we can 

track from the inception of an order through execution and settlement every modification, every change, every hand that touches 

that order through our market processes. And we can then do these 

kinds of market reconstructions far more efficiently than we are 

able to do this one now, having to combine multiple audit trails 

from every one of our trading venues. 

Ms. BEAN. I guess my question is audit trails are after the fact, 

but preemptively, will you be doing scenarios and anticipating if 

someone seeks to do harm in the market or to manipulate the market in some way for their own gain—are you anticipating those potential attempts and running through scenarios? 

Ms. SCHAPIRO. I think we are doing that now, and certainly 

Thursday heightened our urgency about doing that. But I also 

think that having an audit trail and understanding the trading 

data better will enable us to think more creatively about what kind 

of scenarios we ought to be thinking about and worrying about. 

Ms. BEAN. I have another question—go ahead. 

Mr. GENSLER. I was just going to say that although we do similar 

things internally, we don’t think that is enough. One of the reasons 

35 

we came together to form this joint advisory committee is really to 

have outside experts looking out over the horizon and saying what 

is the next emerging risk that we ought to be looking at. 

Ms. BEAN. I see my time has expired. I will yield back. 

Chairman KANJORSKI. Thank you. We will now hear from the 

second gentlelady from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Last but not least. Thank you, Mr. Chairman. 

Following up on that, I think that some of us might recall that 

we do have Chicago First, which is really a public-private partnership that was created in 2003 legislation, and this was following 

9/11 that was a model for the rest of the country, and I think there 

are quite a few of these groups. Have you worked with them at all? 

Ms. SCHAPIRO. I have not. 

Mrs. BIGGERT. Maybe we can discuss that at some time later. 

But my next question was for Chairman Gensler and— 

Mr. GENSLER. Actually, to answer your question, we have worked 

with them. 

Mrs. BIGGERT. As you know, CME uses a number of risk management controls. Can you explain how CME was able to contain 

the contagion that originated in the equities markets? Specifically, 

can you explain how the stop price logic works? 

Mr. GENSLER. There are a number of risk management controls 

in the futures markets. The stop price logic, which is one of four, 

works within their computerized trading platform called glowbacks. 

As the market goes down or up, if the orders in the book are going 

to be spreading so much that there will be a cascading of what is 

called stop-loss limit orders—that is a mouthful. But if there is a 

cascading that I believe goes more than 61⁄2 points, then it will actually pause, give 5 seconds for more orders to come in. 

That is what happened right at the bottom of the market at 

2:45.28, there was a 5 second pause. As the market traded up 

three-quarters of a point and then as it did it sort of moved up. 

Mrs. BIGGERT. So should a similar rule be applied to other markets, equities? 

Mr. GENSLER. I think that Chairman Schapiro is talking—because there are different characteristics, but across the platforms 

to see whether there is something, I would say broadly similar 

though not identical. 

Ms. SCHAPIRO. Broadly similar though not identical. We are looking at individual stocks having circuit breakers that would operate 

to stop trading for a period of time so that algorithms can be refreshed and additional liquidity can be attracted to the markets. 

Mrs. BIGGERT. Next then, has the trading technology gotten 

ahead of the regulators? If the regulators aren’t ahead of the technology, won’t we have problems like last Thursday? 

Mr. GENSLER. I am very proud of the group at the CFTC. I inherited most of them but it is a terrific group. But I do think that we 

have been underfunded on technology. We have a significant investment in front of us to do what we call automated surveillance 

and compliance. We are trying to build the flags and alerts to look 

at the hundreds of thousands of transactions a day by basically 

what is called simply exception reports and then flagging them for 

good people like Mr. Sharrits, who is sitting behind me, and his 

team. 

36 

Mrs. BIGGERT. Okay. Chairman Schapiro? 

Ms. SCHAPIRO. We are significantly underfunded in technology. 

Until just this year, our discretionary technology budget for development projects was 50 percent below what it was in 2005 and our 

markets are vast and complex— 

Mrs. BIGGERT. I know, and I have asked you this question before: 

How old is your technology? Is it 10 years, 20 years? 

Ms. SCHAPIRO. I think it probably depends system by system. 

But Congress has been generous in the past year, we have been 

able to build some new technology to consolidate our tips and complaints and referrals more effectively, but we have some very old 

systems, some of which I recall from when I was a commissioner 

in the early 1990’s. 

Mrs. BIGGERT. And as you talked about your markets, I think it 

has been said that you are still aggregating data from 50-some 

electronic trading venues, and this really highlights the fragmented 

nature, doesn’t it, of our markets? And while this fragmentation 

may be at least partially to blame for this Thursday’s market drop, 

is it also hampering the SEC’s search for explanations? 

Ms. SCHAPIRO. It is making the job more complex. I will say I 

have been envious of Chairman Gensler’s ability to download files 

from a single marketplace largely and conduct their analysis. We 

have to download voluminous files from multiple market participants—191⁄2 billion shares of stock traded on May 6th in 66 million 

transactions. Once we are done analyzing that, we then need to 

compare our analyses with the CFTC so that we are sure we are 

linking the two markets together appropriately. So more technology 

would absolutely enable us to do this job a little bit faster. 

Mrs. BIGGERT. Is there a plan and a timeline for implementation 

of updated technology? 

Ms. SCHAPIRO. We still don’t have the resources to do much of 

what we would like to do. The Commission will consider in the next 

couple of weeks a proposal to create a consolidated order audit trail 

that will give us vast amounts of data and make this kind of reconstruction far simpler than what we are going through right now. 

That will largely be developed by the markets and we will have full 

access to the data. 

Chairman KANJORSKI. The gentlewoman’s time has expired. 

The gentleman from Massachusetts, Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. I want to thank the 

two chairmen and Mr. Cook for coming today. 

I also didn’t expect a whole lot of final answers today. I have 

faith that you will rip this apart for the next several weeks or more 

and come back with a more thorough response, and I think that is 

an appropriate thing. 

I do want to focus on one thing I do think is within your purview, 

not so much for a conclusion as much as just questions, particularly Chairman Schapiro, the decision to cancel trades. 

I have no problem with the concept. My concern is, where do you 

draw the line? As I understand it, give or take 300 entities, or 

whatever it may be, if you are going to cancel some, why not just 

cancel them all? Pick out the timeframe when people started to fall 

off the table, and just from that point forward, something went 

wrong. Because no matter where you draw the line, somebody is 

37 

going to get hurt and somebody is going to sue somebody. They are 

probably going to sue you, not me, so that is okay. But I just don’t 

understand why you drew the line that you drew. 

Ms. SCHAPIRO. We didn’t draw the line, although let me agree 

with you that this was a highly unsatisfying process from my perspective. Under the rules of the exchanges, they draw the line 

about when to cancel erroneous trades, and they met right after 

the market closed on Thursday. 

Mr. CAPUANO. ‘‘They,’’ meaning who? 

Ms. SCHAPIRO. The stock exchanges. And they came up with a 

common standard to cancel trades at prices that they think are 

sharply divergent from the previous day’s close. They selected, and 

it would be great to ask them, I think at the next panel, 60 percent 

off the prior day’s close, or the 2:40 trades, the last probably really 

solid trades in the market. 

A lower threshold would have resulted in many, many, many 

more trades being canceled, which would have had some ripple effect in the markets in terms of traders who were hedged in other 

markets would have had this trade canceled, but their hedges are 

still standing. 

But it is clear that it is not a process that I think works to the 

advantage of investors. So when we brought the exchanges to town 

on Monday, we asked them to think about how we can make a 

more certain and clear process so that investors know up front 

what trades might be broken and what trades might not be broken 

if we have another kind of event like we had on Thursday. 

Mr. CAPUANO. Is this issue now settled? It is done? Going forward is one thing, but for this particular day, is that decision final 

in stone, not to be reviewed? 

Ms. SCHAPIRO. I believe the exchanges will tell you that decision 

is final. I expect that there will be— 

Mr. CAPUANO. I hope they have good lawyers. 

Ms. SCHAPIRO. You may be right about that. 

Mr. CAPUANO. Oh, no, I am right about that. I am a lawyer. I 

would sue you. Depending on what happened in my pension fund, 

I might be suing you. I don’t know. I think it is ridiculous. I think 

it is inappropriate. I think it is arbitrary. Again, I am hoping to 

hear answers, and if not from you, I will ask the next panel. But 

60 percent is some magic number and 59.9 isn’t? That is ridiculous. 

Ms. SCHAPIRO. Exactly. I share your concern, and we are going 

to fix this going forward. 

Mr. CAPUANO. Mr. Gensler, I am not exactly sure whether you 

did the same thing. 

Mr. GENSLER. There were no busted trades in the futures market. The rules in the futures markets are very tight, in terms of 

what is called a ‘‘busted trade,’’ they have to occur within a certain 

number of minutes after the trade and there is a certain limit as 

to how many ticks away from any future that trades that could actually generate that. So, there are very prescribed rules. 

Mr. CAPUANO. That is subject to a specific standing rule? 

Mr. GENSLER. That is correct. 

Mr. CAPUANO. I may argue with what the rule might be, but at 

least everybody who gets into it knows what the rules are. 

Mr. GENSLER. It is very transparent. 

38 

Mr. CAPUANO. I think the problem with the other exchanges is 

the lack of transparency and arbitrariness. I think we have enough 

problems with this. Generating hundreds of thousands of lawsuits 

on the basis of probably billions or tens of billions of dollars doesn’t 

help the situation. But I will ask the next panel. 

Thank you, Mr. Chairman. I yield back the remainder of my 

time. 

Chairman KANJORSKI. Thank you. 

Now, we will hear from the gentleman from California, Mr. 

Campbell. 

Mr. CAMPBELL. Thank you to all three chairmen and Director 

Cook. 

I am trying to understand what we know and what we don’t 

know at this point. So, Chairman Schapiro and Chairman Gensler, 

jump in at any point if you want, but just sort of rapid-fire questions. 

If we focus on these well-publicized trades, the penny, the 

Accentures and so forth, and P&G, which didn’t go to a penny but 

went down; those trades, those trades occurred and were consummated, correct, at the time? So someone bought and sold those 

stocks at a penny. 

Ms. SCHAPIRO. Yes. 

Mr. CAMPBELL. What sort of volume transacted at that level? Do 

we know that? 

Ms. SCHAPIRO. I don’t know that. I would be happy to provide it 

for the record. I know that there were about 300 stocks where 

trades were broken because they were 60 percent or more away 

from the market, and I believe the last number I was told was 

about 19,000 trades. 

Mr. CAMPBELL. Nineteen thousand trades across all those securities at significant volume. So in a given security, were there 1,000 

shares traded at a penny, or were there 300,000 shares traded at 

a penny, or do we know? 

Ms. SCHAPIRO. I would be happy to provide that for the record. 

I don’t know that we have all that data yet. 

Mr. CAMPBELL. Okay. Where were these trades transacted? The 

New York Stock Exchange, NASDAQ, other exchanges? 

Ms. SCHAPIRO. At many places. And that is the nature of our 

very fragmented and dispersed marketplace. NASDAQ. No stock 

exchange trades basically more than 20 percent of the volume or 

25 percent of the volume in its own listed securities because we 

have so many trading venues. So they traded in markets like 

NASDAQ, the New York Stock Exchange, the ECNs, like Direct 

Edge and BATS, and in dark pools where they are not so transparent, and through internalization by broker-dealers. So there are 

multiple ways for a securities transaction to be executed. 

Mr. CAMPBELL. So again, if we take a given security that traded 

at a penny, those transactions occurred on multiple exchanges at 

a penny at that point; or do we know? 

Ms. SCHAPIRO. We don’t know. 

Mr. CAMPBELL. That is part of what we don’t know? 

Ms. SCHAPIRO. Of what we are working on. 

Mr. CAMPBELL. Okay. I suspect a lot of this is what we don’t 

know. And what I think we need to find out before we can, you 

39 

know—you can or we can jump to any conclusions about where this 

should go. 

I understand we have stop-loss orders and those turn into market orders. But then how does it run through—if that happens at 

$30, how does it run through everything to a penny? How did that 

occur? I understand at that point it is a market order and if the 

market is a penny, the market is a penny. But somehow, it has to 

run from $30 to a penny. 

Were there significant transactions all the way down the line, or 

did we have a 20-point gap? 

Ms. SCHAPIRO. In some cases, there were, and in some cases, 

there weren’t. As the orders started to cascade down, there were 

not buy orders on the books of these multiple venues that could 

soak up that selling activity, and as there was continued pressure 

from the sellers, nervous investors who put in stop-loss orders that 

convert basically into a market sell order as they go down, the sellers that were remaining in the market ended up executing against 

what we call stub quotes, and that is where you get the penny 

price. 

A market maker does not want to stand there and provide liquidity. They have to make a two-sided market. They will make a onecent to a $100 market, so that one-cent price is out there in the 

marketplace, and some of these orders hit that. 

Stub quotes—I think the view of the exchanges, as we discussed 

yesterday, was universally that they serve no purpose in our marketplace. So that is another issue that we have on our immediate 

agenda, to consider whether we either have to have real marketmaker obligations to make genuine competitive markets, tight 

spreads, or we get rid of the obligation to have two-sided quotes, 

so we don’t end up with these penny quotes. 

Mr. GENSLER. And if I could say, there is a difference in rules 

in futures and securities, but I am not sure you could translate one 

to another. There are no stop-loss market orders in the futures 

market on both of the major exchanges. It is a stop-loss limit order, 

meaning when the stop is hit. A stop is when the price goes down 

and it hits a price and then the order goes in; it has to have a limit 

to it. 

Mr. CAMPBELL. Let me just ask one more question, then, before 

my time runs out, which is what has changed—this could not have 

happened, I suspect, 15 years ago or 20 years ago or 25 years ago 

or 40 years ago, particularly if you go back to traders on the floor 

with a piece of paper 40 or 50 years ago and so forth. But I guess 

what has changed that enabled that kind of significant—because 

stop-loss orders turning to market orders are not a new thing. This 

has been around for a long time. What is the new thing that occurred that caused this? 

Mr. GENSLER. I think that volatility is part of markets and huge 

volatility was in 1987. I think the change is the floor traders, the 

specialists, or the pit traders in futures, are now more and more 

in some office with computers, and the computers are located right 

next to the exchange engines—that is called co-location—and everything is down to nanoseconds, rather than those liquidity providers used to be either a floor specialist or in the pit. That is one 

thing that has changed in the 20-some years. 

40 

Ms. SCHAPIRO. I would say that while we did have tremendous 

volatility in October of 1987, we had many more market participants who don’t have the same sort of affirmative obligations to the 

marketplace that we had at that time with specialists, with market-makers on the NASDAQ stock market. So speed, volume, velocity of trading, volatility, and lesser obligations to the market as a 

whole. 

Mr. CAMPBELL. My time has expired. Thank you. 

Chairman KANJORSKI. Thank you very much. 

Now, we will hear from the gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. Thank you, Mr. Chairman. 

Does anyone yet understand the origin of the tremendously high 

share prices that were bid, at least reported, $100,000 for Sotheby’s 

and so on? Were these algorithmic bids, or what was the nature of 

them and what was the nature of the firms that made them? 

Ms. SCHAPIRO. I believe we are still looking at that, and I will 

ask Robert to jump in here. Interestingly, there were 20 stocks that 

traded at 90 percent above their 2 p.m. price during that period 

when there were 250 or more stocks that traded at 90 percent 

below their 2 p.m. price. But I don’t know if we know yet the reason. 

Mr. COOK. No, we don’t. There are many more that traded below 

their 2 p.m. price than above, but we don’t yet know the nature of 

the orders that came in that fed into those prices above. 

Mr. FOSTER. So you don’t even know who made them? 

Mr. COOK. Not at this time. That is part of the information we 

are gathering together, because we are pulling together the information as to where the orders originated, at which trading venue, 

and then we will go back further and find out who put them in 

through the brokers. 

Mr. FOSTER. So this many days later, you don’t know who it was 

that made these funny-sounding bids. 

Chairman Gensler, would that be the case with you? 

Mr. GENSLER. No. In the futures market, we didn’t have either, 

because there are so many curbs and limits in this risk management. One of the things that high-frequency or algorithmic traders 

do is called ‘‘sniping,’’ if I may use the term, in which the computers actually put in a bid, one contract or one security at a time, 

and try to pull out the liquidity and find it. If there was a resting 

order, a resting bid at a penny or a resting bid at $100,000, the 

computers can strip through and maybe find it. That may be a possible thing to look at it—it may have been what happened. 

Mr. FOSTER. Are there mandates that automated trading firms 

appropriately version and archive their algorithmic code and their 

databases so they can reproduce their trading decisions after the 

fact in the course of these investigations? 

Mr. GENSLER. We have actually asked for some of these largest 

traders to actually sit down and see their code. Our folks in our 

Division of Market Surveillance are sitting down this week with a 

number of the largest ones and are actually looking at their codes. 

Mr. FOSTER. Right. But it is a possible response that they say, 

‘‘We just don’t know. We had some version, but then we overrode 

it.’’ 

41 

Are there enforced industry standards so that you can actually 

go back and say what version of what code were you running last 

Wednesday afternoon? 

Ms. SCHAPIRO. If they are regulated entities, yes, we can see 

their code and they need to freeze their code if asked. And we have 

told specific firms post-Thursday that we want the code frozen so 

it is not changed. If they are not regulated entities, we have to get 

that information by a subpoena. 

Mr. FOSTER. Could you explain briefly how trade busting works 

on synthetic positions? If the underlying stock is determined to be 

broken, does that automatically imply the breaking of various synthetic positions? How does that work? Is there an agreed-upon way 

that should happen, and is that the way it happens? 

Ms. SCHAPIRO. I can speak to how the securities trades are busted. And as I think we have talked about, it is a pretty unsatisfying 

process because it lacks real clarity and consistency for the investors up front. But the exchanges in this situation—and this is unusual, because your normal trade bust situation is a single stock— 

something goes wrong in the technology and you need to bust a lot 

of trades in one stock. Here we had hundreds of stocks where 

trades needed to be busted because prices were sharply divergent 

from where they had been on the previous day’s close. Exchanges 

meet. They come up with a common standard so that they are all 

busting trades at the same level. 

Mr. FOSTER. My question was: How does that percolate back into 

positions that are derivative positions on equities? 

Ms. SCHAPIRO. In terms of busting, I don’t believe it does. But 

it does have an impact on them. If they have hedged a position that 

is then busted, they have a hedge, they are now exposed. 

Mr. COOK. To follow up on your question, in the securities markets, the options markets would make the decision of whether to 

break the trade if the underlying security trade had been broken. 

In this case, I believe very few options trades were broken, but 

some were. 

Again, the process was not fully coordinated in the sense that the 

options markets made that decision separately from the securities 

markets, and that is one of the things we are looking at going forward. 

Mr. GENSLER. Though I don’t remember everything in CME Rule 

5(8)(a), which is their busting rule, what we had last Thursday, the 

indices themselves, S&P and Dow, didn’t reprice their indices. They 

didn’t come back and say there was a different thing, and I know 

that was relevant to those markets. 

Mr. FOSTER. Okay. Would you say that overall what happened 

last Thursday strengthens or weakens the case for merging the 

CFTC and the SEC? First off, you all know my position that they 

should be merged and moved to Chicago. 

Ms. SCHAPIRO. Okay, I am with you on half of that. I have long 

held the view that the two agencies should be merged; that the 

participants in these markets, the products are increasingly similar 

and the markets are increasingly linked, and there would be efficiency and economy of scale to a merger. But if the political will 

for that to happen doesn’t exist, I think—as I said earlier, this is 

the best working relationship in my many years of being around 

42 

these two agencies I have ever seen in terms of collaboration and 

cooperation—I am not sure that the event of Thursday would have 

played out differently had there been just one agency. 

Mr. FOSTER. Do you share the development of software tools that 

you are both frantically developing to analyze this, or do you have 

independent groups? Do you have any comments? 

Ms. SCHAPIRO. I will tell you, it took an act of Congress to allow 

us to create a joint advisory committee. So the ability of Federal 

agencies to actually share things mystifies me in its limitations. 

Mr. GENSLER. We actually want to thank you. You didn’t know 

you were voting on it at the time, but it was part of the appropriations bill last year. Congressman Lucas probably did know about 

it. I think that our two agencies, and I thank Chairman Schapiro 

for her support the last 11 or 12 months I have been in this job, 

have been very collaborative, and very close. I think the will of 

Congress has been, since the 1930’s really, a strong agency in the 

SEC overseeing its orbit, another agency overseeing the exchange 

derivatives markets, and now we are trying to fill this gap in the 

over-the-counter derivatives market as well. 

Mr. FOSTER. I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Foster. 

That completes our questioning for this panel. I will just take a 

moment before we excuse you, I want to thank both of you again 

and I want to reiterate something that Mr. Scott said in his questioning. After hearing the testimony from our two regulators, I feel 

a lot more secure. I am not certain I could tell you why, but I feel 

a lot more secure. I look forward over the next several weeks to 

open disclosure with the American public and the Congress as to 

what you find, as soon as you find it, so that we can get to a final 

conclusion, but in the meantime, to participate in such rules or 

changes that can help prevent what has happened last Thursday. 

With that, I thank you both very much. We are going to allow 

you to leave so you will be able to enjoy the rest of the day. 

Our second panel, first of all, I thank you for appearing before 

the subcommittee today. Without objection, your written statements will be made a part of the record. You will each be recognized for a 5-minute summary of your testimony. 

First of all, we have Mr. Larry Leibowitz, chief operating officer, 

NYSE Euronext. 

Mr. Leibowitz? 

STATEMENT OF LARRY LEIBOWITZ, CHIEF OPERATING 

OFFICER, NYSE EURONEXT 

Mr. LEIBOWITZ. Good afternoon. Chairman Kanjorski, Ranking 

Member Garrett, and members of the subcommittee, my name is 

Larry Leibowitz. I am the chief operating officer of NYSE 

Euronext. Thank you for the opportunity to be here today. 

We commend the subcommittee for your rapid response to the 

events of last Thursday. As you know, we have begun a dialogue 

with our regulators and our other trading venues, and it has been 

very productive. We are committed to working with you and other 

market participants to restore confidence and enhance investor 

safeguards in the future. 

43 

Today, I would like to discuss three things: first, the high-level 

causes of the events last Thursday; second, clarifications about 

NYSE’s market model and how it worked; and third, our recommendations going forward. 

It is understandable that everyone is looking for a smoking gun 

behind last Thursday’s dip. However, the circumstances are more 

complicated than that. I will leave it to the regulators we just 

heard from to link the interactions of various markets, but from 

our standpoint, we see no evidence of the ‘‘fat finger’’ error or market manipulation. But we also note that more and more our markets within the United States, and indeed within the world, are 

intertwined. 

However, we do see the following: elevated market activity coming from adverse European news, including a huge and a broadlybased wave of orders and quotes at around 2:30 p.m.; a significant 

reduction in market liquidity as measured by the size of order 

books through the day which accelerated dramatically through the 

downturn; and various microstructure issues that resulted in certain marketplaces not interacting with one another which exacerbated the liquidity effect. 

The NYSE has embraced electronic trading, and we believe our 

market model provides the best combination of cutting-edge technology with human judgment. The NYSE hybrid market rules expressly provide mechanisms to mitigate volatility and large price 

swings, which we always have believed is a critical piece of our offering to listed companies and their investors. 

Specifically, the NYSE incorporates in our trading structure a 

type of circuit breaker mechanism known as liquidity replenishment points, or LRPs, which temporarily and automatically pause 

trading in stocks when significant price movement occurs. On a 

typical day, LRPs are triggered 100 to 200 times, lasting for seconds at most, and, during the recent financial crisis, served the 

market well. 

Let me be clear: The LRP mechanism does not halt trading. Instead, for a short time, trading is automatically paused to facilitate 

more accurate price discovery and prevent the market from a sudden and significant move. During this pause, our quote is visible 

to other market participants and new orders are accepted. To jump 

on Chairman Gensler’s analogy, our LRPs are analogous to taking 

the controls of a plane off autopilot during turbulence. 

I want to highlight a few specifics and clarify some anecdotal 

statements that have been made. This is not meant as a comment 

on other markets or other market models, just to clarify from the 

NYSE standpoint what we saw. 

During the 2:30 to 3:00 period, market share on NYSE was 5 

percentage points higher than usual during that time of day. Participation rate of our designated market-makers, formally known as 

specialists, was equally strong. This was evidence that our liquidity 

providers did not walk away from the market as we actively traded 

during the downturn. Furthermore, to demonstrate that LRPs protected orders in our market, stocks listed on other markets had 

price declines and erroneous executions far greater than on NYSElisted stocks. 

44 

Lastly, the overall marketplace needed to cancel approximately 

15,000 executions after Thursday’s decline. On NYSE, even though 

we handled the largest share of orders in the marketplace, we had 

to cancel zero trades because of the protective measures in our 

market. 

One note: LRPs are not intended to prevent the market from falling. Rather, our LRPs are designed to protect the integrity of our 

market by preventing a panic-led downdraft and mitigating systemic risk. Yet when we are in a slow mode, other electronic markets may choose to ignore our quotes as permitted under regulation 

NMS. 

The bottom line is that while there is always room to improve 

LRPs and other such mechanisms, these actually worked reasonably well on Thursday. However, the mechanism is only truly effective if observed by other trading venues, and that is why Chairman 

Schapiro’s plan for an industry-wide trading circuit breaker is 

needed. 

In terms of recommendations, I want to focus on three main topics, echoing much of what Chairman Schapiro stated earlier. 

First, our markets need a preestablished and coordinated way to 

respond to extreme rapid volatility. The LRP system has worked, 

but marketwide circuit breakers are necessary and will be even 

more effective. The listing and trading venues have agreed to develop these stock-level circuit breakers to pause trading when the 

price of a security has changed dramatically in a short period. Once 

circuit breakers have been triggered in a security, they will apply 

to all trading in the security, wherever it takes place. 

Second, the current marketwide circuit breakers were established long ago and are based on market moves of 10 percent, 20 

percent, and 30 percent. There has not been a move greater than 

10 percent in a single day post-2000. These levels will be tightened 

and the circuit breaker will be based on a broader index, rather 

than a narrow Dow Jones index. 

Third, the rules on cancellation of trades will be further defined. 

On May 6th, it was announced, after markets closed, that any 

trades executed at 60 percent above or below the last price at 2:40 

would be canceled. This action was not predictable and caused confusion in the markets. We are working with regulators and other 

exchanges to establish clear cancellation rules for the future, 

though circuit breakers will help mitigate this problem substantially. 

To facilitate a review of extraordinary trading events, there 

should be a consolidated audit trail that will allow regulators to 

easily review marketwide trade data. We understand the SEC is 

developing such a proposal and we are committed to assisting in 

that effort. 

Ultimately, these and other important actions may best be 

achieved by consolidating market surveillance in one securities regulator, probably FINRA, which will require an act of Congress. We 

also at the same time need to ensure that both FINRA and the 

SEC have the full funding required to perform these duties. 

Finally, the SEC should continue its broad-based market review 

to help find ways to improve our current market structure. 

45 

In closing, we applaud the SEC and the CFTC for working together to review the events of May 6th and to develop a coordinated response. We at NYSE Euronext are committed to maintaining our ongoing productive dialogue with these agencies and other 

trading venues. 

Once again, thank you for the opportunity to appear, and later 

on I will be happy to answer any questions you may have. 

[The prepared statement of Mr. Leibowitz can be found on page 

95 of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Leibowitz. 

Now, we will hear from Mr. Eric Noll, executive vice president, 

NASDAQ Transaction Services. 

STATEMENT OF ERIC NOLL, EXECUTIVE VICE PRESIDENT, 

NASDAQ OMX GROUP, INC. 

Mr. NOLL. Good afternoon, Chairman Kanjorski, Ranking Member Garrett, and members of the subcommittee. Thank you for letting me speak to you today. 

We met yesterday, along with our fellow exchanges, with Chairman Schapiro to develop a strategy to combat market instability 

and protect investors in the wake of last Thursday. We will act 

jointly to assess and implement changes to enhance the market’s 

ability to handle unusual trading events in the future. 

Our markets are strong despite the 17 minutes of unusual trading that occurred on May 6th. In fact, the market’s rapid recovery 

during the day confirms their resilience under extraordinary 

strength. 

To fully understand May 6th, you have to look at the state of the 

markets heading into last week. Markets were nervous and operating during an unusually long upward trend. From a market low 

of below 1300 March 2009, the NASDAQ composite index had risen 

steadily to 2535 on April 26, 2010. 

Chairman KANJORSKI. Mr. Noll, could you see if your microphone 

is on or whether it is close enough to you? 

Mr. NOLL. Sorry. 

Markets were also becoming increasingly volatile, according to 

the CBOE Volatility Index, which measures volatility of the S&P 

500 expected over the next 30 days. Note that the VIX is normally 

below 20, and by May 5th, the VIX reached the upper 20’s, and on 

May 6th and 7th, it closed above 30, and it did in fact trade above 

40 on several occasions during that period of time. 

This increased volatility is tied to the escalating financial crisis 

in Greece and Europe. While percolating for several months, the 

potential harm seemed to sink into the U.S. markets last week. 

Against this backdrop, we arrive at the afternoon of May 6th. 

First, the Dow Jones Industrial Average was already trading off 

272 points for the day and 500 points in the last 3 days. Second, 

the Chicago Mercantile Exchange was beginning to experience unusual trading activity in the E-Mini Junes at the same time as equities handled heavy trading in the highly correlated equities to 

that E-Mini future. 

E-Mini volumes rose and prices began sinking rapidly at 2:42, 

just before equity prices sank rapidly as well. At 2:45:30, the EMini trading became so volatile that the CME triggered an autoVerDate Nov 24 2008 16:03 Nov 10, 2010 Jkt 058043 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\58043.TXT TERRIE
46 

matic 5-second trading pause in the E-Mini futures. The price of 

the E-Mini future immediately leveled off and began to climb rapidly. Equities followed shortly thereafter. 

Third, the NYSE Arc Exchange began experiencing data communication issues that hindered the electronic linkages between it and 

other exchanges. Simultaneously, the New York Stock Exchange 

began reporting multiple liquidity replenishment points, or LRPs, 

and gap quotes that impacted the trading of individual stocks in 

the New York exchange market. 

From 2:39 to 2:47, the Dow dropped 723 points to 9800.69, its 

low for the day, and down 995 points total from the prior close. 

From 2:47 to 2:56, the Dow recovered just as rapidly, rising 612 

points, from 9862 to 9974, down 387 points for the day. From 2:56 

to the close, the Dow rose another 45 points, ending the day down 

324 points. 

NASDAQ’s preliminary analysis indicates the unusual trading 

activity on May 6th was triggered by a confluence of unusual 

events, including events outside the cash equities markets. 

NASDAQ continues to investigate Thursday’s events, but at 

present has located no smoking gun that single-handedly caused or 

explained Thursday’s events. 

From a systems standpoint, NASDAQ’s market operated continuously during the day and the critical 17 minutes. Each and every 

one of NASDAQ’s electronic systems functioned as designed and as 

intended: our execution engine, our market data feeds, and our surveillance systems. 

We have detected no system malfunction or errant trade by a 

NASDAQ member interacting with the NASDAQ stock market. No 

NASDAQ member has identified a system error or aberration within their own systems. 

As stated, NASDAQ supports the response of the SEC. We support the recommendation to update market circuit breakers. We 

think a circuit breaker should automatically halt trading in all 

stocks and in all markets in measured stages. We would expect 

that Chairman Schapiro, based on her testimony, will have some 

announcements about what those finally will look like in the very 

near future. 

We also support the Commission’s desire to explore cross-market 

single-stock trading halts. The important characteristics of such a 

halt should be consistency across all the markets, initiation by the 

primary market, and an orderly resumption of trading by the primary market. Any rule should recognize that stocks trade in different ways rather than a one-size-fits-all approach. 

We do believe, however, that trading halts and other regulator 

actions should never be a tool used by a primary market or any 

other other marketplace for any competitive reason or to disadvantage any other national market system participant. 

Finally, we are exploring other ideas that will improve and encourage high-quality and continuous quoting on all markets. 

Thank you again for the opportunity to share our views. I am 

happy to respond to any questions you may have. 

[The prepared statement of Mr. Noll can be found on page 106 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Noll. 

47 

Now, I recognize the gentlelady from Illinois, Mrs. Biggert, to introduce our next witness. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I would like to welcome my constituent, Mr. Terrence Duffy, and thank him for joining us today. Mr. Duffy is the executive chairman of the CME 

Group, and I thank him for joining us and sharing his expertise. 

STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, 

CME GROUP INC. 

Mr. DUFFY. Thank you, Congresswoman Biggert. Chairman Kanjorski, Ranking Member Garrett, and members of the subcommittee, I am Terry Duffy, executive chairman of the CME 

Group, and I want to thank you for allowing me to testify today. 

It is widely known that futures markets are the leading indicators for cash markets. Our reviews of the market’s activity revealed 

no suspicious or erroneous activity by our customers. The exchange 

did not bust or reprice any transactions. Further, our analysis indicates that the decline in the SPDR ETFs and 3M stock preceded 

the drop in the S&P 500 contract. As I will show you in a moment, 

they were far more severe, even after substantial price recovery in 

the S&P 500 futures contract. Liquidity in the S&P futures and its 

effective spreads were considerably better than the SPDR ETFs 

throughout the day on Thursday. 

At this point, it is premature to draw any definitive conclusions 

as to what caused the extreme market volatility on May 6th. What 

we do know is that there were a number of macroeconomic conditions, as well as lack of operational harmonization across the multiple trading venues of the equity markets. This resulted in the 

cancellation or busting of securities transactions by the NASDAQ 

stock market and NYSE Arca. In contrast, CME Group’s E-Mini 

S&P 500 futures contract performed smoothly despite significant 

market activity and volatility. 

The selloff and subsequent rebound in the E-Mini S&P 500 Index 

futures, while dramatic, was very orderly. Our markets provided 

the liquidity investors needed to hedge against the turmoil happening elsewhere. 

As I mentioned earlier, CME Group’s E-Mini 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 index futures a valuable risk-management tool for market 

participants. 

To illustrate this point, I would 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 real-time basis. This means the futures 

market reflects conditions in real time, while the cash market has 

a 15-second delay. 

The first chart shows the comparative value of the E-Mini traded 

on the futures market versus the equities markets. It illustrates 

that the E-Mini S&P, which is the blue line, moved virtually in 

tandem with the SPDR ETF market as well as the S&P 500 Index, 

which is the red line. 

48 

You can see at 13:46 p.m., the market had had time to attract 

liquidity and rebalance, and the E-Mini led the recovery, leading 

the Dow Jones to recover 400 points in 3 minutes. 

Moving to chart 2, this graph shows price movement in the EMini S&P futures as well as 3M stock. As you can see, the price 

of 3M stock declined much more rapidly, starting at 13:45 while 

the E-Mini S&P 500 was hitting a low at 13:45 and 50 seconds, at 

which time you can see the market and the E-Mini reverses, while 

the 3M stock continues to decline. 

Market integrity is of the utmost importance to CME Group. We 

have developed systems that maintain integrity in all our markets, 

including a number of controls to protect market users. 

For example, CME is the only exchange in the world that requires pre-execution credit controls. As Chairman Gensler mentioned, CME Globex maintains functionality that causes the match 

engine to pause when orders, if they were executed, would exceed 

predetermined levels. Following the 5-second pause, new orders 

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 Globex electronic 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 of the continuous 

triggering or the election of trading of stop orders. This is what 

happened last week with the E-Mini and S&P futures, allowing liquidity to come into the market and ultimately leading to the rally 

in the equities market. 

We believe the focus of your review should be on the national 

market system. We support Chairman Schapiro’s recommendation 

regarding harmonization across these platforms. We have seen no 

evidence that high-frequency or other specific trading practices in 

any way magnified the decline on May 6th. In fact, we believe that 

high-frequency traders in our market provided liquidity on both 

sides of the market on this extraordinary day. 

We do, however, recognize that changes should be considered to 

avoid a repeat of the events of May 6th. We would make the following recommendations. 

As Chairman Schapiro pointed out, circuit breakers, including 

circuit breakers for individual stocks, such as those implemented 

by the NYSE, must be harmonized across markets. 

We also believe that stop logic functionality should be adopted 

across markets on a product-by-product basis to prevent cascading 

downward market movements. The circuit breaker levels of 10, 20, 

and 30 percent and the duration of the halt and time of day at 

which triggers are applicable should be reevaluated in light of current market conditions to determine whether any changes are warranted. Any such changes must be implemented across all market 

venues. 

I thank the committee for the opportunity to share CME’s views, 

and I look forward to answering your questions. 

49 

[The prepared statement of Mr. Duffy can be found on page 70 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Duffy. 

Now, we will move on to questions. I will take my question period first. 

Mr. Noll and Mr. Leibowitz, listening to your testimony, I am not 

sure anything happened on Thursday. Everything worked. Is that 

correct? 

Mr. LEIBOWITZ. Oh, I don’t think any of us would say that everything worked. I think, in fact, what Mr. Noll was saying was his 

systems worked. But I think we would all agree that the market 

did not. 

Chairman KANJORSKI. What caused the market not to work? 

Mr. LEIBOWITZ. I think what both of us have found is liquidity 

fled the market through the day as the market was skittish, and 

then an overwhelming wave of orders came in on the sell side that 

built on itself. I think having a marketwide circuit breaker in effect 

would have helped mitigate that problem. But in effect, the market 

was illiquid just at the wrong time as sellers broke into the market. 

Eric? 

Mr. NOLL. Thank you, Larry. 

Mr. Chairman, I think there are two things to observe that happened. I would agree with Mr. Leibowitz that in fact the markets 

did not behave normally on that day. I think my point was really 

our technology behaved as it was designed to behave that day. 

I think it is important to observe two things. One is that the 

marketwide circuit breakers we do in fact have in place today were 

not triggered, because the market did not fall to the point where 

they were triggered and therefore cause a marketwide halt. So I 

think Chairman Schapiro is correct when she says that we should 

in fact revisit those and reinstitute different types of marketwide 

circuit breakers that will arrest those marketwide halts as they 

happen. 

I think the other point that she made vividly today, which we 

certainly agree with at NASDAQ, is that we do need a coordinated 

stock-by-stock circuit breaker across all the markets, which we 

don’t currently have on our books and we don’t have the authority 

to implement. So I think we will see that soon coming out of the 

SEC. 

Chairman KANJORSKI. There was no problem on your part on either of the two exchanges with the fact that the New York exchange did a slowdown operation, but NASDAQ continued going 

right on and allowed the sales to pass through to the NASDAQ exchange. That had no effect; is that correct? 

Mr. NOLL. I think we would say that was a contributing cause 

to a confluence of events here. It points to what we would argue, 

the need for a coordinated stock-by-stock circuit breaker. 

Mr. LEIBOWITZ. From our standpoint, I think what we have 

shown or what we see is we don’t think the fact we were moving 

slowly exacerbated the effect. In fact, the fact that we were trading 

high-market share, keeping the stock prices in line, might actually 

have helped, and the fact that other markets that didn’t have circuit breakers at all, like the NASDAQ listed market, had even 

50 

more damage than in the New York listed market. But I think we 

can all agree that having uniform marketwide circuit breakers 

would have helped in all events. 

Chairman KANJORSKI. I have a question there. Everybody wants 

to protect the private market and have the market function. But 

is this the first time you have made that observation, either of the 

two major markets, that one set of rules was in place in the New 

York Stock Exchange and another set of rules in NASDAQ, and 

that you were not coordinated to operate in tandem together, so 

that this could happen—or you did not realize this could happen? 

Mr. NOLL. I think what is fair, Mr. Chairman, is our markets are 

very coordinated in many ways. We have very similar corporate 

governance standards for our listed companies. As an example, not 

having to do specifically with trading, but for marketwide declines, 

overall market circuit breakers, we are coordinated. We have open 

‘‘meet me’’ lines that we use frequently during trading problems 

and technology problems. 

Chairman KANJORSKI. Mr. Noll, do not give me everything you 

are coordinated on. We do not want to know that. We want to know 

why this abnegation occurred. 

Mr. NOLL. I am suggesting that we speak often about many 

issues. The one issue that had never appeared yet as a significant 

problem between our two markets is the coordination of a stock-bystock circuit breaker. 

Chairman KANJORSKI. What you are saying is because it never 

occurred, you did not simulate the possibility that it could occur, 

and you did not cooperate together to put in place common rules 

that would have prevented it from occurring; is that correct? 

What I am trying to drive at here is obviously two free-market 

operations relying on either the United States Congress or the regulators to take care of the problem rather than doing it yourselves. 

Mr. LEIBOWITZ. So as permitted by SEC regulations, we do have 

different trading models. We rely on designated market-makers 

who have an obligation to the market. They have a different type 

of trading markets. So there are various areas where our rules are 

slightly different. 

We have seen times during the crisis in the fourth quarter of 

2008 where there was significant breakage of trades in the electronics markets, erroneous trades, that there were not in the 

NYSE-traded market. At the time, no one felt that the separate 

rules exacerbated the problem. It is just there were more breaks 

in the electronic markets. There were tens of thousands of trades 

taken off the tape in the fourth quarter of 2008. 

Chairman KANJORSKI. My time has expired. The gentleman from 

New Jersey, Mr. Garrett. 

Mr. GARRETT. And as is often the case, I will follow up where the 

chairman was perhaps going on that. 

So is this something, from what you are saying, is this a situation then, thinking back if you had this hearing awhile ago, that 

we just could not have seen coming? 

Mr. NOLL. I think it is hard to say that we could have seen this 

coming. So we have a set of rules in place called Regena MES 

which governs the respect of different markets, and when they are 

quoting and when they are not quoting, and a whole set of proceVerDate Nov 24 2008 16:03 Nov 10, 2010 Jkt 058043 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\58043.TXT TERRIE
51 

dures around that, that we believe have worked very well up until 

to this point. I do believe they continue to work very well. As a 

matter of fact, Mr. Leibowitz operates an electronic market on 

NYSE Arca well that participates in Regena MES as well as the 

New York floor. They were engaged in the same electronic trading 

we were on Thursday and participating with us. So generally I 

think that rule set works extraordinarily well. 

We did hit a confluence of events where clearly we need to do 

something to address—and I think what Chairman Schapiro suggests, which we agree with fully, is that we need that coordinated 

stock-by-stock circuit breaker. 

Mr. GARRETT. And just to go down that road a little bit, Mr. 

Leibowitz, maybe you were touching on it, if I was hearing you as 

you were saying it, as far as those issues that are out there, the 

confluence of issues, was one of those issues that were in the confluence what was going on over in Europe and the fact of the whole 

Greek situation? 

And, Mr. Noll, I think you said the United States was finally 

paying attention to that. Was part of that the fact that the value 

of the Euro currency was going down, other foreign currencies in 

relationship were going up, and the banks were having a difficult 

time with their carry trade in that respect, and so in order to deal 

with that, they had to do something, which I guess is to unload equities? Was that an element of what was coming out of Europe at 

that period of time? 

Mr. LEIBOWITZ. I don’t think we have any visibility into that, and 

we haven’t heard that. I think we are really focusing on our market 

and leaving the SEC and CFTC to see the cross-market effects. 

Mr. GARRETT. Does anybody else have a thought on that, as far 

as what the influence of that, as being one of the confluences of 

their impact to their trades as well? 

Mr. NOLL. We have seen no evidence of that, and as Larry said, 

we are very focused on what happened in our individual markets. 

Mr. GARRETT. To the extent you are focused on what is happening in individual markets, the chairman was saying before that 

here, 4 days later, we are still trying to get all the data collected 

from all the 40 or 50, however many there are right now, data 

sources. There is no central repository for all those trades, and that 

is why she is going out to get them, as she is, I guess. Is that a 

problem? Is that something that we should have seen in the past 

and tried to address? 

Mr. NOLL. I think the chairman and I think other people in the 

marketplace have recognized that was a potential problem before. 

As a matter of fact, there have been ongoing discussions with 

FINRA and the SEC and all the markets about a consolidated 

audit trail that predates the May 6th event. It is unfortunate that 

we have not gotten to that point so far in the marketplace. 

Mr. GARRETT. Is there something that holds that up? Is there 

somebody opposed to that? 

Mr. NOLL. As far as I know, no one is opposed to that. I think 

it is a matter of applying the process and getting it done. 

Mr. GARRETT. Who is responsible for that? 

Mr. NOLL. Again, it is a marketwide issue among multiple regulators. I think there may even be, I am not absolutely positive 

52 

about this, but I think there may be some congressional authority 

needed for the SEC in order to do so. 

Mr. GARRETT. To do something like that. To the point as far as 

what authority the SEC has now and what they may need in the 

future, one of the points has already been addressed, and you 

raised this to some extent as far as the commonality of the market 

callers that potentially bid on there. 

Is there a difference as far as the folks who are at the table right 

now, the major participants in it, and some of the smaller alternative platforms, as far as whether this should be uniform across 

them all? And if the answer is no, why shouldn’t it be? And if the 

answer is yes, would that impact upon the slightly different models 

that some of the smaller market participants would have? 

Mr. LEIBOWITZ. The answer is there should be one standard 

across all platforms, whether it is an exchange, an ETS, an ECN, 

any different venue. And there will be. 

Mr. GARRETT. And if we didn’t have any of them here, but if they 

were sitting here, what would their argument be why that should 

be the case? 

Mr. NOLL. I don’t believe anyone would argue against a stock-bystock circuit breaker at this point. 

Mr. LEIBOWITZ. I think you have already seen CESMA and various other bodies come out in favor of it. I think that the industry 

at this point would line up 100 percent behind it. 

Mr. GARRETT. Okay. And what about the time to implement 

these changes? As you said, a lot this has been looked at for a long 

period of time. Regulation NMS took a long time in order to implement. We are talking here about implementing this like this quickly. Is there a problem if we move too quickly at this point in time, 

or is this just the right thing to do? 

Mr. NOLL. I think on the marketwide circuit breaker issue, I 

think we can move very quickly on that. I think the chairman will 

be discussing with us making rule filings, adopting new 

marketwide circuit breakers, relatively shortly, and then we will 

process those and put them in place very efficaciously. 

I think as we deal with some of the stock-by-stock issues, we may 

run across some technology issues with that— 

Mr. GARRETT. What issues? I am sorry. 

Mr. NOLL. There may be some technological issues putting them 

in place, but I think those are short-dated, not long-dated. 

Mr. GARRETT. Thank you. I thank the Chair. Thank you to the 

witnesses. 

Chairman KANJORSKI. Thank you very much, Mr. Garrett. 

The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you. 

We are talking here about how to make high-frequency trading 

safer. The question is, does it fulfill any social utility at all? In the 

old days, somebody would want to sell a stock for $10 and somebody else might want to buy it for $10.05. I remember when there 

was an 18th of a point. Somewhere, there was a settlement in between, and maybe—or the other of those two real investors got a 

slightly better deal. Now there is somebody with a fast computer 

who can come in and scoop up that 5 cents to make sure that neither of the real investors benefits from it. 

53 

I realize Wall Street makes a lot of money from all this high-frequency trading, but the question is: Does it help provide liquidity 

or in some other way allocate capital? Now, the events of last week 

seem to indicate that high-frequency trading doesn’t provide liquidity, it uses up liquidity, demands liquidity, and in fact, there was 

no liquidity for a few minutes. 

I will start with Mr. Leibowitz. If we didn’t have high-frequency 

trading, would this hurt the companies that are doing business and 

their employees? 

Mr. LEIBOWITZ. Sure, though I am going to stay away from 

whether there is any social value to this. What I will say is, the 

market-makers have existed for hundreds of years, so it is not correct to say that in the past if somebody sold at $10 and they wanted to buy at $10.05, they matched up. The difference is they were 

physical people, whether sitting on the floor of the stock or marketmakers at NASDAQ. But there has always been a middleman in 

trading, and what they do is they match up buyers and sellers. 

Sometimes they play a role, sometimes they actually don’t, they 

just match them together. And sometimes when somebody wants to 

sell, the buyer doesn’t happen to be there. So they are matching 

different time horizons on the buy and the sell. 

I think as technology caused trading to speed up, people were unable to keep up with that in a market-making capacity. That is 

why the specialists have been replaced by what we call ‘‘designated 

market-makers,’’ who in effect are high-frequency traders, but they 

have obligations into our market. They have to have a quoting requirement. They have to provide a certain amount of liquidity. 

They are not allowed to take more than a certain amount of liquidity from the market. So they are high-frequency traders that operate in a very structured environment. 

Mr. SHERMAN. What percentage of the high-frequency trading is 

done by these—I will use the old term, ‘‘market-makers?’’ 

Mr. LEIBOWITZ. I would say first, in the case of DMMs, they provide 10 percent of the liquidity to the New York Stock Exchange 

market. There is another form of market-maker that we have also 

in that variety that is another 10 percent. I would say on the 

broader market— 

Mr. SHERMAN. If I can interrupt, because I only have 5 minutes, 

I am not asking what percentage of liquidity is provided by these 

individuals, I am asking what percent of the high-frequency trading. 

It has been reported that two-thirds of the trades in the United 

States are these high-frequency traders; you are describing what 

would seem to be just a very small percentage of the high-frequency traders. 

Mr. LEIBOWITZ. I would estimate that about 40 to 45 percent of 

the market is high-frequency market-makers of some form, either 

DMMs, SOPs or other things. The balance of what you make into 

that two-thirds is really algorithmic trading. That could be a big 

mutual fund deciding to sell 10 million shares in an electronic form 

that is implemented in a series of small trades that looks like a 

high-frequency trade. 

So you have to be really careful, and that is why we heartily endorse Chairman Schapiro’s large trader reporting scheme where we 

54 

can get some transparency into what these high-frequency trades 

are doing. 

Mr. SHERMAN. Most of us, when we think in terms of high-frequency trading, are looking at those buying and selling the same 

stock within a short window, not somebody who is selling it and 

selling it and selling it; which, as you say, could be an investor deciding to unload a stock or a portion of it. 

Mr. Noll, do you have a comment on this? 

Mr. NOLL. Yes. I think when you look at—notwithstanding last 

Thursday’s events, I think if you look at the quality of our markets 

over the last number of years, I think you would see an increasing 

tightening of the bid-offer spread and an increasing provision of liquidity at those tighter spreads. 

So I think our concern would be as we look at this issue—and 

we agree with Mr. Leibowitz and Chairman Schapiro that we do 

really have to study what high-frequency traders are doing and 

how they are operating in the marketplace—I think the prima facie 

evidence is, however, that they provide a real value in the sense 

they provide deep markets, they provide tighter bid-offer spreads, 

they have reduced costs for all market participants to access the 

markets. 

I do think, however, that we need to also look at how they interact in the market on an ongoing basis. I think they have to provide 

real liquidity. 

Mr. SHERMAN. Obviously, last week they were the cause of the 

absence of liquidity. But I believe my time has expired. You can respond further for the record. 

Mr. NOLL. I would say that we are not sure that is in fact the 

case. I think it is an overstatement to say that we know it was 

high-frequency traders. I think that is an issue that we are continuing to look at at this point. It appears to have been a very 

broad market selloff with many market participants, not just highfrequency traders involved in that. 

Chairman KANJORSKI. The gentleman from Alabama, Mr. Bachus. 

Mr. BACHUS. I know history teaches us there have been some 

pretty dramatic falls in the market before we even had electronic 

trading, so I don’t think the culprit is high-frequency trading. I 

guess that is part of the debate. 

One thing I think we can never prevent is negative market developments or economic developments from affecting the market, so I 

am just trying to think of—you have shifts in sentiment, so that 

is going to move the market and cause changes in volatility. So 

what you really want is the market to reflect all those things and 

to do it, I guess, as efficiently as possible. 

I am very encouraged by what I hear today and what happened 

yesterday, in that I think that there has been, maybe as a result 

of last Thursday, and the concern that I think everyone had before, 

is that we are coming into an agreement that there ought to be 

some sort of marketwide circuit breakers. Is that right? Do you all 

agree on that? 

Mr. LEIBOWITZ. Absolutely. 

Mr. NOLL. Absolutely. 

55 

Mr. BACHUS. And coordinated maybe stock-by-stock circuit breakers? 

Mr. NOLL. We all agree with that. 

Mr. BACHUS. Mr. Duffy, do you agree with that? 

Mr. DUFFY. Yes. We agree with that and we see no issue with 

that. But, again, this is not pertaining to the CME Group. We don’t 

trade individual stocks. 

Mr. BACHUS. Okay. I guess if you trade an option or you trade 

an ETF or something, you trade options, do you trade those? 

Mr. DUFFY. The CME Group, no. We trade futures. We trade options on futures. We don’t trade the SPDR. 

Mr. BACHUS. All right. Let me ask all of you, we have kind of 

gone from a highly structured duopoly, at least with stock trading, 

to a much more fragmented system. How would you advise the regulators to meet the challenges of addressing marked integrity and 

price discovery without hurting competition? 

Mr. DUFFY. I will be happy to start, even though I think this is 

more your bailiwick, but I will jump in. 

I do think that you need to have the same set of standards and 

protocols across the multiple markets, and I think it is as simple 

as that. You can’t have one set of rules at the NYSE and at 

NASDAQ, and then you have different sets of rules at BATS and 

other ECNs. It is not going to work. It is a recipe for disaster. No 

one has been able to explain how Accenture went from $41 to a 

penny yet, and that to me is just amazing, how you can’t explain 

that. I think you have to have the same protocol across these marketplaces. 

Mr. BACHUS. All right. Mr. Leibowitz or Mr. Noll? 

Mr. LEIBOWITZ. Sure. I think that it is clear that the complexity 

of our market represents a challenge for regulators. There is no 

doubt about it. And I think that the SEC is trying to respond to 

that challenge. 

I think the concept, the release that they just issued to review 

various aspects, whether it is ATSs, whether it is Reg NMS, whether it is sponsored access, are all exactly well-timed, and they just 

need the resources and need to be nimble enough to get through 

that. 

I think the challenge is that it is just that we are in an environment that is relatively complex, and small changes have unintended consequences. So for example, just saying, ‘‘Let’s ban highfrequency trading,’’ I think we would be stunned with the consequences. I think that even small changes have very big effects 

that we may not see, and they just need to be careful, while at the 

same time moving quickly when we see a problem where we all 

agree, like marketwide circuit breakers on individual stocks. That 

is easy one. That is a no-brainer. 

Mr. NOLL. I would agree with Mr. Leibowitz. And I think some 

of the things that we have talked about already indicate that we 

are moving in that direction, both on marketwide circuit breakers 

on individual stocks changing marketwide circuit breakers on the 

entire market as well as talking about things like the consolidated 

audit trail and other functionality that we give the SEC. 

I think this is a very complex market. I think Chairman Schapiro 

and Chairman Gensler are fully aware of how complex it is and 

56 

have the tools and intellectual capital to deal with that. And we 

are here to assist them to do with that. 

Mr. BACHUS. All right. 

Mr. Leibowitz, what you said I agree with, that the markets and 

exchanges handled volatility quite well during the financial crisis 

in 2008. They didn’t react quite as well to the volatility last Thursday. What do you see is the difference? 

Mr. LEIBOWITZ. It is interesting because we actually discussed 

this at considerable length. And I think it has to do with things 

happening at a certain point in the day. A lot of the news on the 

financial crisis came out overnight, where markets had a chance to 

absorb that news. 

This is something that happened during the day. And, as Mr. 

Noll was saying, it was almost, like, set up. The market was in a 

jittery situation. The VIX was rising. There was nervousness about 

Europe. And then there was the speculation through the day and 

the announcement of what was going on in Greece. And it really 

just happened at a bad time. 

Had that news come out overnight, my guess is we would not 

have seen nearly the sort of swing that we saw during the day. 

Mr. BACHUS. All right. Thank you. 

Mr. SCOTT. [presiding] Let me follow up on that. Let me ask this 

question on the circuit breaker concept. 

Right now, we are in a situation where we have computers which 

are using very difficult mathematical formulas to trade millions of 

shares of stock in milliseconds. And our solution to this, as I hear 

you say, and Chairmen Schapiro and Gensler, is to institute stockby-stock circuit breakers marketwide in a centralized way. 

I saw a movie about a couple of weeks ago, and it is a fun movie 

if you want to see it. It is called ‘‘Eagle Eye.’’ I don’t know if you 

saw that movie, but if you get a chance, it is very interesting. It 

just simply points out what happens in concentrating and putting 

so much control into a computer. 

So what I want to ask each of you—because, apparently, as I 

hear your testimony, particularly the New York Stock Exchange, 

have said that you have circuit breakers. The complaint was that 

maybe that moved too slow. 

So, as we debate this issue of circuit breakers, I want each of you 

to tell us, are there any downsides? Is there anything we have to 

fear here? Is there an element of freedom that takes out of the free 

enterprise system the freedom of the market exchange? 

Let us be very clear. Is there anything we have to fear if this is 

the solution of putting this much control in a stock-by-stock, 

marketwide, one central location of a circuit breaker? 

Mr. NOLL. If I could address that in two parts, Mr. Chairman. 

I think the issue for us is that technology, in and of itself, is a tool. 

It is a tool used by market participants and, I think, used very effectively by market participants. We view the functioning of our 

market and its continuous operation as one of the envies of the 

world. And, generally, with the exception of that 17-minute period 

on May 6th, it functions extraordinarily well. 

And I would argue, even during that period of time, our technology functioned well, but the market participants that were on 

our market experienced an absence of liquidity. So what we are 

57 

really concerned about here is when our markets become dysfunctional. 

And I think what the chairman has proposed and what we have 

discussed as exchanges is not putting centralized control over the 

marketwide, stock-by-stock circuit breakers, but adopting similar 

rules so that we all have the same standard rule for when a stock 

gets halted. 

We each have our own technology. We will continue to operate 

our own technology separately from one another, with the oversight 

of the SEC. So I don’t think that we are talking about a central 

computer that is going to control this. I think what we are talking 

about is a coordination of our rule sets with one another on when 

a marketwide, stock-by-stock halt should be called. 

Mr. SCOTT. Okay. 

Mr. LEIBOWITZ. I think we would agree with Mr. Noll, which is 

that information is transmitted to the market faster and faster. 

When events happen, it just ripples through the market. It is on 

CNBC within seconds. And the fact that trading is speeding up 

every day means that the market reacts faster. 

I think all this is really designed to do is cause a quick pause 

to make sure that everybody understands what is happening and 

the symbols of liquidity so that we don’t hit a down pocket like we 

did before. 

I think all of us are strong believers in free market. We compete 

with each other, and we compete with each other aggressively. And 

yet we can agree on certain principles like these circuit breakers 

that I think make the market far better for investors. Because, in 

the end, if we don’t very a market that investors believe in, if they 

feel it is a rigged game, they are not going to invest their money. 

That is going to harm capital formation, retirement savings, all of 

these things. 

Mr. SCOTT. Mr. Duffy? 

Mr. DUFFY. Mr. Scott, I think you asked a very interesting question, which is, what about technology? We continue to build it; will 

it eventually consume us, is what I think I heard your question to 

be, and what are we doing besides putting circuit breakers in place 

to make sure that events like this don’t happen again? 

There is more to it than just circuit breakers, sir. There is preexecution. There are multiple different technology vendors you 

have to go to. But then you have to really get into what is the most 

important, in my opinion; you have to have an experienced risk 

management team. You have to have a deep regulatory department 

within your institution to make certain that all these transactions 

are done legitimately and your technology team can work with your 

management team and your risk management parameters to make 

certain that these computers don’t go out of control. 

Mr. SCOTT. Exactly. That is my point. I know my time is up here, 

but that is a very serious point. Because if we are going to coordinate this, there has to be some mechanism that triggers it. 

And I think that was the failure in the New York Stock Exchange. You have a circuit breaker there, and apparently it did not 

work because of something with the trigger. Is that correct? 

Mr. LEIBOWITZ. No, that is not correct, actually. 

Mr. SCOTT. All right. 

58 

Mr. LEIBOWITZ. Our circuit breakers actually triggered perfectly 

well. The problem is that in the current U.S. market regulations, 

the other venues don’t have to obey us when we are in a circuit 

breaker mode. 

Mr. SCOTT. I see. 

Mr. LEIBOWITZ. So it worked perfectly well for our market and 

for any other markets that observed our circuit breaker. However, 

it clearly shows a failing in our market if another market doesn’t 

have to follow that circuit breaker. So that is why we have agreed 

on marketwide circuit breakers. 

But I would agree with Mr. Duffy that this doesn’t end the conversation. We have to continually look at ways that we can safeguard the market, that we can make sure the technology is doing 

what it is supposed to be doing, and that we don’t, sort of, go down 

this path. 

Mr. SCOTT. My final point on this, and I will be finished, is: If 

we go with this circuit breaker, marketwide, stock by stock, from 

each of you very quickly, is there any downside? Is there anything 

we have to worry about if we go this way? 

Mr. NOLL. I think, very quickly on that point, I think the only 

downside is the true price discovery is not being found. 

Mr. SCOTT. I am sorry? 

Mr. NOLL. The true price discovery could be interfered with. So 

I think it is important for us, as we design these marketwide, 

stock-by-stock circuit breakers, if we do so, that we want to make 

sure that buyers and sellers are able to find each other in an efficient and fair fashion but that we aren’t otherwise closing off price 

discovery inadvertently. Because the impact of that closing it off 

will re-effect itself when the stock starts to trade again, and you 

will have this cascading effect as opposed to true price discovery. 

Mr. SCOTT. All right. Thank you. 

Mr. DUFFY. I do believe that Mr. Noll is correct, but I also believe 

that price discovery is done throughout a period of the trading session, not on a microsecond. So you do need to discover price over 

a period of time and let everybody participate. So I hear what he 

is saying, but at the same time I don’t completely agree with that. 

Mr. SCOTT. All right. 

Mr. Leibowitz? 

Mr. LEIBOWITZ. I think it is incumbent upon us to build these circuit breakers in a way that helps the market function properly, go 

through the auction process, which is what is supposed to happen, 

and give the market a chance to pause and establish the right 

price. 

I think Mr. Noll is right. If we don’t do a good job of it, then we 

will be in the same place we were. But it is incumbent on us, as 

exchanges, to work together to make that process work properly. 

Mr. SCOTT. Thank you very much. My time is way past. I thank 

the rest of the committee for my indulgence. 

Ms. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Mr. Duffy, in your testimony, you talked about the stop price 

logic. You also highlight a number of risk management controls 

used at CME in addition to the circuit breaker rules. 

59 

Specifically, could you walk us through the difference between 

the circuit breakers and the stop price logic employed at CME? 

Mr. DUFFY. Sure. Circuit breakers, as we all know, were coordinated amongst the securities exchanges with the futures exchanges. There is a 10 percent, 20 percent, 30 percent circuit 

breaker depending on what time of day it happens. So, in the first 

half of the day, up until 1:30, it is 10 percent of the market. Then 

it goes to 20 percent, and then it goes—if it goes to 30 percent of 

the market, the market is closed all day. 

What the stop functionality that we have deployed at CME 

Group is, if our market goes up or down in a—roughly, if you used 

the equivalent price of the E-mini S&P contract today or the S&P 

index, it is a half of 1 percent. If it cannot find liquidity to fill that 

order in a half of 1 percent, it stops for 5 seconds, it allows the 

market to take a breath to try to seek liquidity. If it cannot seek 

liquidity in that 5-second period, it will then halt another 5 seconds 

and then try to seek the liquidity again. So that is the way the stop 

logic functionality works. 

And then, obviously, we have the circuit breakers in place also, 

in coordination with the— 

Mrs. BIGGERT. Then what happened on Thursday that stabilized 

the market activity? 

Mr. DUFFY. There is no question, Congresswoman—we brought 

these charts for a purpose because they absolutely make sense. 

And you can see that the stop logic worked. The futures market 

stop logic kicked in. People had an opportunity to assemble liquidity. The market started to go the other direction, and we led that 

direction. So I think our functionality worked flawlessly. 

Mrs. BIGGERT. You say that this functionality is not available in 

the securities market. Is it just because they don’t use it or— 

Mr. DUFFY. To be perfectly honest with you, this is patented 

technology by CME Group. And I am certain that we would be 

happy, without a cost, to give it to the securities exchanges if this 

made the whole system better. 

Mrs. BIGGERT. So it can work for, really, any individual stocks 

or— 

Mr. DUFFY. We do believe it could. 

Mrs. BIGGERT. Okay. 

I would also like to ask the other gentlemen, Mr. Noll and Mr. 

Leibowitz, would you consider using this? Do you think that this 

would be available? 

Mr. LEIBOWITZ. I think we would consider all options. But, on the 

other hand, right now we actually have a circuit breaker, the 

functionality of which works. The problem is it is not marketwide. 

So the LRPs are very similar, hopefully not patent-infringing on 

what the CME is doing. In terms of what we do is if the stock 

moves a certain amount in a certain amount of time, and that 

amount is gauged by how much liquidity in the stock and what the 

stock price is, it triggers a slow quote, in which case we take some 

amount of time to attract liquidity and unwind the slow quote. So 

it is very similar to what the CME does, except theirs is fully automated, as I understand it, just triggered by time. Ours involves 

DMM involvement to unwind it. 

60 

Now, each exchange, we will figure out a way, Mr. Noll will figure out a way for NASDAQ, we will discuss the rules for implementing—but, essentially, in the end, the stock circuit breakers 

will be very similar to the stop-loss pauses that Mr. Duffy has explained. 

Mrs. BIGGERT. Except that it is not now. It didn’t work on Thursday. 

Mr. LEIBOWITZ. No, I disagree. They actually worked in the New 

York Stock Exchange market. The failure was that not all the markets were obeying them. So what we need to do is just implement 

them. Whether we implement his version, Mr. Duffy’s version, or 

a slightly different version, because securities do trade slightly differently, we will figure that out. 

But this is really—as Mr. Noll said, it is an implementation from 

a technology standpoint, because we, as exchanges, and the SEC 

have agreed essentially on a framework for going forward with 

that. 

Mrs. BIGGERT. In other words, for it to work, it has to be implemented across all market venues? 

Mr. LEIBOWITZ. What will most likely happen is it is a listing 

venue; so, in the case of—when I say ‘‘listing stocks,’’ our exchange—in the case of NASDAQ listed stocks, NASDAQ will implement the stop-loss trigger, and the other markets will have to obey 

it with respect to their listed stocks, as I understand it. 

Mrs. BIGGERT. Okay. 

Mr. NOLL. I agree. I think that is where we will end up. 

Mrs. BIGGERT. Mr. Noll, I am sorry. I didn’t hear you. 

Mr. NOLL. I said that I think that is where we will end up, where 

the listing venue will determine when a stock should be halted 

across the markets, and all the other listing venues will obey that 

stock. 

Mrs. BIGGERT. How long do you think this will take to work that 

out? 

Mr. NOLL. I think the rules set or at least an understanding of 

the functionality will probably take place over the next couple of 

days, where we will all agree on this is the outside framework in 

which we should operate this—the marketwide stock-by-stock 

framework in. 

The actual implementation, I think, is still subject to all of us revisiting our technology and revisiting how long it will take us to 

implement that. 

Mr. LEIBOWITZ. Right. I think we are going to have answers. We 

all have this as a high-priority item. Obviously, as the New York 

Stock Exchange, we would throw out using our system and having 

everybody obey the circuit breakers that are now in place, but we 

recognize that is not amenable to most market participants. 

Mrs. BIGGERT. Okay. 

Thank you. I yield back. 

Mr. SCOTT. Thank you. 

Now the gentleman from Indiana, Mr. Carson. 

Mr. CARSON. Thank you, Mr. Chairman. 

A question for Mr. Duffy, even though no one had answers on 

May 6th, CME took the unusual step of commenting on individual 

61 

participation in its markets when it denied that Citigroup may 

have executed an irregular trade. 

First, how was CME able, during that frenetic day, to absolve 

Citigroup of any involvement? And, second, how do you reconcile 

CME’s Citigroup statement with its policy of not commenting on individual market participation? 

Mr. DUFFY. Congressman, that is a great question. It was a very 

difficult situation for us at the time because you have to realize we 

are working on real time, with the situation happening, with the 

rumors that somebody from Citigroup entered in a $16 million notional transaction in the E-mini and instead entered $16 billion of 

notional into the E-mini. We knew, because of the systems we have 

in place, that was categorically false. 

We could ring-fence Citibank’s inventory that they did on CME 

Group on a real-time basis within moments. We traditionally would 

not ever make statements like that because of the situation the 

banks have been in. We thought it was the prudent thing to do on 

Citibank’s behalf and, actually, on behalf of the taxpayers, since 

they own such a big portion of Citi. We thought it was the right 

thing to do to make the statement to make sure the rumor went 

away. 

Mr. CARSON. Mr. Leibowitz, although the cause of the May 6th 

volatility spike has yet to be determined, do preliminary investigations indicate flaws in the current regulatory framework? And, 

also, can regulatory improvements, whether at the SEC or the 

CFTC or exchange levels, prevent what essentially could be an extraordinary technological glitch? 

Mr. LEIBOWITZ. I think what we have recognized is the lack of 

marketwide circuit breakers that everyone obeys on a stock-bystock basis is clearly a failure among our markets to work together 

properly and create the right market environment. 

I think the SEC concept review, which they are doing right now, 

will help identify other areas where we may feel that either regulation is lacking; maybe there is not enough surveillance. I think 

many of us believe, at this point, that centralized surveillance is 

critical in this market. 

To be honest, I feel sorry for the SEC staff who has to assemble 

from 40 different venues the amount of data they have done. And 

they have done amazing work in doing it. But we need to not be 

in this situation going forward, and I think we are committed and 

I know Mr. Noll’s group is committed to working with the SEC to 

make that happen. 

Mr. CARSON. Okay. And lastly, Mr. Noll, can you please give us 

a rundown of the decision-making process that resulted in the cancellation of almost 300 trades of stocks and exchange-traded funds? 

Mr. NOLL. Sure, I would be happy to do that. 

First of all, I think it is important to note that this was a multiexchange decision. All the marketplaces participated in the decision 

to break the trades that occurred in that period of time between 

2:40 and 3:00, so it was not one market making the decision on behalf of all others; it was all markets in consultation with one another. 

And I think we were governed by two things that influenced our 

decision-making process there. The first one was: When, in fact, did 

62 

the markets become disorderly as opposed to orderly? So, if you 

look at some of the time in sales and some of the trades that occurred in that period of time, their fall, even though it was drastic 

and fast, was what we would call orderly. In other words, they 

were walking down the order books step-by-step in the way they 

were supposed to happen. It was only at the very bottom where we 

started to see very anomalous prints. So we were very concerned 

about drawing the line at a level where we addressed the anomalous prints and not the, sort of, order-by-order orderly trading that 

was going on. 

And we were very cognizant of what I would call the moral hazard problem, which is that people should bear the consequences of 

their actions. We didn’t know who was going to win or lose by 

drawing the line where we did, but we were sure that below that 

line, we were capturing the bulk of the anomalous trades, but 

above that line, people’s behavior—they bear some consequence for 

that. And so, whether they won or lost during that period of time, 

they should bear that consequence for being a market participant 

there. 

So we were very cognizant not to reward people for bad behavior, 

but to save people from what we considered to be an anomalous 

failure of the markets at that particular time. 

Mr. CARSON. Thank you, sir. 

Mr. Chairman, I yield back. 

Mr. SCOTT. Thank you very much. 

The gentleman from Indiana, Mr. Manzullo—I am sorry, Illinois. 

I apologize. 

Mr. MANZULLO. It is close. 

Mr. Duffy, on page 1 of your testimony, you state that, ‘‘The most 

significant equity index futures contract traded on the CME Group 

exchanges is the E-mini S&P 500 futures contract.’’ 

Mr. DUFFY. Yes, sir. 

Mr. MANZULLO. And then, also, ‘‘In 2009, the average daily volume for the E-mini S&P 500 futures contract was 2,207,596 contracts.’’ 

And then you continue that theme on page 2. You discuss the 

trading data for the time period between 1:00 and 2:00 Central 

Standard Time. Your analysis of the trading activity during that 

hour indicates that the E-mini S&P futures contract was not the 

triggering event. I have heard reports that the E-mini S&P futures 

contract led the sell-off that precipitated the decline of the Dow. 

Can you walk us through what happened with the E-mini and 

your thoughts on what may have been the true triggering event? 

Mr. DUFFY. I think we have heard a lot about different events 

in the marketplace leading up to the time coming into question. 

The volume in the E-mini was heavy. This is not unusual. E-mini 

trades about 4X or 4 times the amount of the SPDR contract. At 

that particular time, we traded about 10 times the volume. So we 

saw a flight to quality, to CME Group, to trade our most highly liquid product. 

As I said earlier, futures contracts, by design, are indicators of 

people’s potential viewpoint on what they think is going to happen. 

So they are traditionally leaders, up and down, in the marketplace. 

63 

And, again, our markets operated within all the protocols of 

CME’s systems. So we didn’t have any ‘‘fat-finger’’ issues; we were 

confident of that. The market was moving quite rapidly. At the 

same time, there were a lot of macroeconomic events that were 

happening. 

So, yes, it was unusual activity. Nobody is going to deny that. It 

happened, and it happened quickly. But, again, we didn’t bust 

trades. We looked at some of the algorithmic traders, as has been 

questioned here. They were basically more liquidity providers at 

the time in question; they were not aggressors or taking the market. So they were there on both sides, bid and offer. So they were 

leading the market because of the nature of the product, sir. 

And then, as you could see, our stop logic worked, and the listed 

stocks kept going down for whatever reason. That is still yet to be 

explained, why they went to the prices they did. We did not trigger, 

which would have been only—a stop circuit breaker for CME would 

have been the 20 percent circuit breaker that is instituted amongst 

all the exchanges, and we were roughly about 9.5 percent at the 

lowest point in the S&P contract, sir. 

Mr. MANZULLO. Let me ask you an unrelated question because 

something obviously—maybe not obviously, but apparently something spooked the market. Anything to do with the problem in 

Greece or worldwide activity or inability to predict what is going 

on with regard to the euro? Do you see any connection there at all, 

or is it just a coincidence? 

Mr. DUFFY. I have seen a lot of high volatility, sir, especially 

coming into that day. So all those events were on the front page, 

so I am sure they had a contributing factor to the market conditions that led up to the precipitous down-move. 

And, at the same time, you have to remember we saw a couple stocks trading at a penny that were $40 stocks. So one was probably wondering what was going on in the marketplace. 

Mr. MANZULLO. Mr. Noll, would you like to comment on that last 

question? 

Mr. NOLL. On the volatility in the marketplace at that time? 

Mr. MANZULLO. Yes. 

Mr. NOLL. Yes, I— 

Mr. MANZULLO. It doesn’t have to be a precise answer because 

no one knows. 

Mr. NOLL. I don’t think we have a precise answer yet, and I am 

not sure that we will ever get a precise answer as to the nature 

of what was the root cause of the uncertainty in the marketplace. 

But I do think what is very clear is that we saw an increasing 

amount of volatility on the days leading up to May 6th. We have 

seen the spike in all the measurements of volatility. The day of 

May 6th itself was already a volatile day before the events we are 

talking about here happened. So it was already a severe down day. 

It was also the third day in a row of down equity markets. 

So I think when we hit these air pockets or this confluence of 

events, if I could call it that, we were in a position where there was 

just a massive downdraft in the marketplace, which we recovered 

from, but nonetheless I think it is important for us to address the 

causes and to prevent that from happening going forward. 

Mr. MANZULLO. Mr. Leibowitz? 

64 

Mr. LEIBOWITZ. Yes, I think the two gentleman to my left have 

hit it right, which is it was a spooked market—I think you even 

used that term. The market became very illiquid and choppy. And 

it is very likely that some news out of Europe might have gotten 

people selling. 

But I think the behavior that you then saw, selling some stocks 

down to a penny, that is not permissible behavior. That is a market 

structure failure that we have it incumbent upon us to correct. 

On the other hand, markets are allowed to sell off in a reasonable way. And so, if investors were afraid of Greece and the euro 

and anything else that was going on, they should be selling the 

market off. What we are really addressing is, is it happening in a 

reasonable and orderly way? Are investors being disadvantaged by 

events transpiring on the exchange? It would be hard to justify to 

a retail investor that he sold the stock at a penny. 

And so, that clearly has to be addressed. The fact that something 

triggered a sell-off—if we can’t find an actual cause, meaning a 

trader or—and there are so many rumors, and that is part of— 

what we live with that every day in our market. The rumors get 

transmitted so quickly that we just have to deal with that. 

Mr. MANZULLO. Mr. Chairman, could I ask one more question? 

Mr. SCOTT. Yes, you may. 

Mr. MANZULLO. Thank you. 

Your answers take into consideration or are obviously based 

upon the fact that there really wasn’t anybody out there who 

‘‘made a killing’’ that day. Is that correct? There is no bad person 

out there or somebody that you can say, look what he or she or 

they did as a group that caused this? 

Mr. NOLL. I think the investigations and looking at the evidence 

will take place over the next couple of days and weeks until all the 

determinations are made of everyone’s behavior, whether it was 

good or bad or within the rules or not within the rules. 

As of today, on the NASDAQ systems and in the NASDAQ market, we have not seen anything that would suggest to us that anyone was behaving in an inappropriate fashion. 

Mr. LEIBOWITZ. And I would say quite the opposite of making a 

killing, if algorithmic traders did, in fact, follow the market down, 

chances are they got hurt pretty badly, because the market just 

snapped right back and they sold way below where the market 

ended up. 

So, while retail investors and others followed it down with them, 

my guess is whoever led it down, intentionally or not, did not make 

a killing. 

Mr. MANZULLO. Okay. 

Mr. DUFFY. Congressman, yes, I agree with both of these gentlemen. I have not heard anything extraordinary. But, then again, it 

is a sensitive topic, and we will let our regulatory departments investigate that with due process. 

Mr. MANZULLO. Thank you. 

Mr. SCOTT. Thank you, sir. 

Now, we will hear from the gentleman from New Jersey, Mr. 

Garrett. 

Mr. GARRETT. Just with one last question. And I appreciate all 

your time here. 

65 

You are all on board with the circuit breaker idea, and I have 

spent a lot of time on it. And, Mr. Duffy, I think you just mentioned with what your system, as far as the 20 percent— 

Mr. DUFFY. Our system on a circuit breaker? 

Mr. GARRETT. Yes. 

Mr. DUFFY. It is basically—the way that it works today, it goes 

down roughly a half a percent of what the value of the S&P contract is today. If it doesn’t have the liquidity to fill the number of 

contracts, buy or sell, it will halt for 5 seconds, and then it will try 

to attract that liquidity. If it doesn’t do it, it will try to halt another 

5 seconds to attract that liquidity to fill the order in that period. 

Mr. GARRETT. Okay. 

And from the other gentlemen, when you will be meeting with 

Chairman Schapiro and the rest in the next few days and what 

have you to try to come up with uniformity on these issues, is there 

a lower level that you would say this was just not a realistic figure? 

If you here at my opening comment, I said there were rumors out 

there saying that you are looking at bands of 2 percent or so that 

would just be too restrictive for individual stocks and what have 

you. So what is the appropriate level? That is my final question. 

Mr. NOLL. Yes, I think we are still engaged in that effort of determining the appropriate level. I happen to share your concern 

that we not draw the bands too tightly. 

Mr. GARRETT. And what is that? 

Mr. NOLL. I think 2 percent, quite frankly, is too tight. I think 

what we saw on Thursday was the LRP functionality going off at 

2 percent levels, which caused dislocations in the marketplace, perhaps unintentionally, but nonetheless caused dislocations in the 

marketplace, while other markets continued to provide liquidity at 

that level. 

So, I think as Larry has suggested earlier, we need to agree on 

what the right, appropriate levels are. I don’t think 2 percent is the 

right level. We tend to believe that it should be 10 percent. But I 

think that is still a moving target for all of us. 

Mr. LEIBOWITZ. Yes, I would agree with Mr. Noll 100 percent. We 

use for our LRPs relatively tight bands. In Procter & Gamble, it 

actually is about 2 percent. But the intention is to continue trading 

and get it going relatively quickly. 

Mr. GARRETT. Right. 

Mr. LEIBOWITZ. I think for this, we are going to use broader 

bands, because we want them to be marketwide and we need everyone to agree to them. 

Mr. DUFFY. Congressman, if I could just make one comment, the 

10 percent, 20 percent, and 30 percent, which the gentleman is referring to here, can certainly be narrowed, but I think if you narrow those percentages, what is more important then is to narrow 

the timeframe that the markets close, because they will be seeking 

liquidity at other venues, whether it is overseas or somewhere else. 

So if you narrowed a time to 5, 15, and 10—whatever you want 

to come up with, pick your favorite number, you can’t be closed for 

an hour or you can’t be closed all day. You narrow those time windows and narrow the bands, and it will work out for everybody. 

Mr. LEIBOWITZ. Yes, I think that is a great point. On a stock-bystock basis, we are talking about a couple of minutes at most. And 

66 

on a marketwide basis, as we narrow the marketwide bands, we 

are really talking about moving the timeframe in for the close, so 

it is not as long a close as it was in the past. 

Mr. GARRETT. Yes. That is a good point about overseas trades. 

I was going to bring that up before, but— 

Mr. DUFFY. That is exactly where it will go, sir. 

Mr. GARRETT. —thank you, Mr. Chairman. 

Mr. SCOTT. Thank you, Mr. Garrett. 

I want to thank each of you—Mr. Leibowitz, Mr. Noll, Mr. Duffy, 

and also Chairman Schapiro and Chairman Gensler—for your excellent, superb, and well-presented testimony today on this very 

critical issue as we move to make sure we maintain the strongest 

investor confidence in our financial markets and in our investor 

trading. Thank you again, very, very much, for coming before our 

committee and helping us with this. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

Before we adjourn, the following will be made part of the record 

of this hearing: the written statement of Commissioner Bart 

Chilton, Commodities Future Trading Commission. Without objection, it is so ordered. 

The panel is dismissed, and this hearing is adjourned. 

[Whereupon, at 6:32 p.m., the hearing was adjourned.] 

(67) 

A P P E N D I X 

May 11, 2010 

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