Anxiety over the "flash crash" on Wall Street on May 6 may have contributed to the withdrawal of retail investors from the stock market in recent months, the head of the Securities and Exchange Commission said Tuesday.
SEC Chairman Mary Schapiro said the panicked disruption, which saw the Dow Jones industrials plunge nearly 1,000 points in less than a half-hour, "was clearly a market failure" that heightened concerns over the fast-evolving structure of the market.
Schapiro said the SEC has received written comments from brokerage firms saying their retail customers have pulled back from the market since the May 6 plunge. Many individual investors filed comments that are sharply critical of the current market structure, Schapiro said in a speech to the Economic Club of New York.
The "flash crash" highlighted the growing complexity and diversity of the securities markets. Sleek electronic trading platforms now compete with the traditional exchanges, with stocks traded on some 50 exchanges beyond the New York Stock Exchange and the Nasdaq stock market. Powerful computers give so-called "high frequency" traders a split-second edge in buying or selling stocks — based on mathematical formulas. The risk looms that electronic errors at high speeds could ripple through markets and disrupt them.
In response to the May 6 episode, the SEC put in effect a six-month pilot program that briefly halts trading of some stocks that make big price swings. The "circuit breakers" took effect in mid-June. Under the rules, trading of any Standard & Poor's 500 stock that rises or falls 10 percent or more within a five-minute span is halted for five additional minutes.
She called the new circuit breakers "an essential first step — but I believe they can be improved."
"Some could argue that May 6 was an aberration — another perfect storm — and now that it has passed markets have naturally adapted leaving no need for a comprehensive review of our market structure," Schapiro said. "I disagree."
Bloomberg News contributed to this report
