Brokers Face Flash Crash Sweep

NEW YORK (TheStreet) -- Wall Street firms that gave high-frequency traders direct access to the equity markets and contributed to last May's "Flash Crash" could face sanctions from market watchdogs.

Broker/dealers will be the subject of regulatory "sweep" by the Financial Industry Regulatory Authority (FINRA) that will focus their dealings with high-frequency traders, according to an article in today's Financial Times. The regulator will try and determine whether the broker/dealers have the proper risk management controls in order to police clients that buy and sell securities quickly through computer driven algorithmic trades.

FINRA chairman Richard Ketchum said that the regulator would focus on whether broker/dealers - which act as gatekeepers to the equity and bond markets - are monitoring their clients trading closely enough to prevent another market meltdown. "The brokers should be satisfied they know who's really operating these systems," Ketchum told the FT.

On May 6th the trading in stock market became highly volatile and within the span of a few minutes the Dow Jones Industrial Average (DJI) plummeted nearly 1,000. At the time, many on Wall Street were at a loss for the violent swing in stock prices. However, later many pointed the finger at high-frequency trading firms.

The exchanges most affected by the flash crash were the New York Stock Exchange, which is operated by NYSE Euronext (NYX)and the Nasdaq Stock Market, which is operated by Nasdaq OMX Group (NDAQ).

Next month, the Securities and Exchange Commission and the Commodity Futures Trading Commission will come out with their own report on the flash crash.

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