NEW YORK — Federal regulators reviewing Thursday's stock plunge will try to determine if the five-fold increase in the number of American equity exchanges has left them unable to manage the biggest surges in volume.
Almost 1.3 billion shares traded on U.S. markets in a 10-minute span starting at 2:40 p.m. EDT, six times the average, sending prices lower on platforms from New York to Kansas. Nasdaq said it canceled transactions in 286 stocks where swings grew too wide. Federal agencies began inquiries after more than $700 billion in value was erased in an eight-minute span.
While most of the losses were reversed as the pace of trading slowed and exchanges were able to match buyers and sellers, the 998-point plunge in the Dow Jones industrial average raised concerns that the United States was entering another financial crisis. The Securities and Exchange Commission will try to determine if market participants accidentally or maliciously derailed trading, according to two people familiar with the situation. Lawmakers plan to hold hearings this week.
"Markets aren't supposed to work this way," said Jamie Selway, managing director of White Cap Trading in New York and a former chief economist at NYSE Arca, a unit of NYSE Euronext. "There was a mad rush for the exits. We just don't know whether it was accidental or intentional."
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Thursday's rout showed how the fragmentation of the U.S. equity market may suppress demand when it's needed most, especially when the New York Stock Exchange attempts to calm trading, said James Angel, a finance professor at Georgetown.
NYSE Euronext chief operating officer Larry Leibowitz said the Big Board prevented a bigger decline.
While the first half of the intraday plunge probably reflected normal trading as concern increased that Greece's credit crisis will spread, the sell-off snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said.
Accenture, Exelon and Philip Morris International were among stocks that dropped more than 90 percent as U.S. equities tumbled, before recovering within minutes, according to Bloomberg data. Prices fell to pennies in some companies after the New York Stock Exchange switched from electronic matching to auctions, a program that encourages some sell orders to flow to smaller exchanges that had few if any buyers, according to Leibowitz.
"If you look at the charts you can see fairly clearly where the trades came in," he said. "It's that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split-instant because there really was no liquidity in electronic markets."
Increasing automation and competition have reduced the NYSE and Nasdaq's volume in securities they list as much as 80 percent in the last decade. Now, fewer than 30 percent of trading in their companies takes place on their networks as orders are dispersed to as many as 50 competing venues, almost all of them fully electronic. Twenty years ago, fewer than 10 exchanges competed for all U.S. equity trades.
More than 29.4 billion shares changed hands in U.S. markets Thursday, the most since October 2008. In addition to traditional exchanges such as the NYSE, rivals Bats Global Markets in Lenexa and Direct Edge in Jersey City, N.J., handled millions of trades. About 2.6 billion shares traded on the NYSE, the lowest level relative to overall volume in three years, data compiled by Bloomberg shows.
"When a large order or series of orders comes into electronic markets, they don't really have any way to recognize either that they're a mistake or to slow them down to attract the proper liquidity," Leibowitz said.
The market rout triggered scrutiny from lawmakers. Rep. Paul Kanjorski, D-Pa., set a Tuesday hearing. Sen. Ted Kaufman, D-Del., questioned whether markets that increasingly rely on computer algorithms to execute thousands of transactions in seconds triggered false trades.
"This is unacceptable," Kanjorski, who leads the House Financial Services subcommittee that oversees the SEC, said in a statement. "We cannot allow a technological error to spook the markets and cause panic."