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Senator Reed Wants Review of Markets in Wake of Glitches

An influential U.S. lawmaker pledged to take a closer look at the safety and soundness of the equity markets following a recent string of technology glitches on Wall Street.

WASHINGTON -- An influential U.S. lawmaker pledged on Thursday to take a closer look at the safety and soundness of the equity markets following a recent string of technology glitches on Wall Street.

Senator Jack Reed, who chairs the Senate Banking subcommittee on securities, said the recent incidents, including Nasdaq's botched handling of the Facebook IPO and Knight Capital's $440 million in losses due to a software error, raise concerns about potential systemic risks to the marketplace.

[For more coverage of the testimony at the SEC, read: Tabb Senate Testimony: Beware Over-Regulation.]

The problems also raise the question whether regulations have kept pace with changing technology in the marketplace, Reed said.

"Our marketplace has been evolving very quickly and it is not clear that our rules have kept up," he said at a subcommittee hearing on the impact of automated trading. "We need to focus on whether markets have the ability to avoid systematic failure triggered by a computer problem."

The debate over high-speed trading was heightened by the May 6, 2010 "flash crash," when the Dow Jones Industrial Average plunged about 700 points before rebounding within minutes.

More recently, market maker Knight Capital was nearly bankrupted by a software glitch.

Nasdaq also botched Facebook's May 18 initial public offering, leading to hundred of millions of dollars in losses among market-making firms and brokerages.

At the Thursday hearing, market participants suggested changes that might bring more stability to the market, including so-called "kill switches" that would shut off access to the market for a trader that exceeded a preset trading limit.

"Such a kill switch would have severely limited the damage done on August 1st," said Chris Concannon, a partner at Virtu Financial, referring to Knight Capital's problems.

At a separate conference, the chief regulator of the U.S. brokerage industry also voiced support for such a mechanism.

"Firms need to re-examine how prepared they are to deal with the inevitable problems that come out of testing," Richard Ketchum, the head of the Financial Industry Regulatory Authority, told reporters on the sidelines of the Security Trader Association's conference.

Reed, a Democrat from Rhode Island, said he planned to hold further hearings on the larger topic, but reserved judgment on what kinds of policy responses might be in order.

"No one has a full, complete, definitive answer," he said, speaking to the conference ahead of the hearing on Thursday. "That is why we are asking questions."

The U.S. Securities and Exchange Commission is also scheduled to host a technology roundtable in October to examine the issue.

Copyright 2010 by Reuters. All rights reserved.

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