WASHINGTON – Two weeks after the stock market's epic dive, federal regulators and U.S. securities exchanges have a new plan to keep it from happening again, proposing that essentially markets call a "time out" when trading gets too chaotic.
The question is whether it will work. The big stock exchanges say that new curbs on trading known as "circuit breakers" will help prevent runaway market drops. But not everyone is convinced. To some market watchers, the rules are too limited. To others, the rules go too far.
The government's two top market regulators are appearing before a Senate panel Thursday in the aftermath of the wild trading day that stunned Wall Street, and Washington, on May 6. Mary Schapiro, chairman of the Securities and Exchange Commission, and Gary Gensler, head of the Commodity Futures Trading Commission, will testify at the hearing.
Also coming before the Senate Banking subcommittee on securities are senior officials of the Financial Industry Regulatory Authority, which is the brokerage industry's self-policing body, and the parent companies of the New York Stock Exchange, the Nasdaq stock market and the Chicago Mercantile Exchange.
The SEC on Tuesday unveiled the new plan for circuit breakers, which was agreed upon with the exchanges. Under the plan, trading of any Standard & Poor's 500 stock that rises or falls 10 percent or more within a five-minute period would be halted for five minutes. The rules would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time — nearly the entire trading day.
The reality, however, is that it may not be know whether the new curbs are effective, too limited or too extreme until there is another day like May 6, when intense selling sent the Dow Jones industrials down to a loss of almost 1,000 points in less than a half-hour.
The idea behind the circuit breakers is that by giving investors a break during extreme market dips, they'll be less likely to set off a chain reaction of human and computerized selling.
That's one of several possible causes of the May 6 plunge. The drop, dubbed by some a "flash crash," briefly wiped out $1 trillion in market value as some stocks traded as low as a penny.
Meanwhile, the investigation by the SEC and the CFTC has brought out only a preliminary picture of what caused the cascade of market distress that day. Investigators are focusing on, among other things, a possible link between the steep decline in prices of stock indexes, and "simultaneous and subsequent" waves of selling in individual stocks.
Also being looked at is a "severe mismatch" of liquidity in the market that may have been worsened by the withdrawal of electronic traders and the use of so-called "stop-loss" market orders, a new report by staff of the two agencies said. Stop-loss orders set the price at which a stock is automatically sold when it declines to a specified level.
What if the new circuit breakers were in place on May 6?
"I believe that day would've played out significantly different," said Joe Ratterman, CEO of the third-largest U.S. stock exchange, BATS Exchange, which helped devise the new rules.
"There would've been chaos," Ratterman said, "but that pausing would've created enough breathing room for people to realize that the falling prices weren't based on fundamentals," or economic or corporate news.
"You wouldn't have seen all those stocks trading for a penny."
About 30 stocks in the S&P 500 index fell at least 10 percent within five minutes. Halting trading of those stocks would have put a lid on the panic and kept more investors in the market, said Manoj Narang, founder and CEO of Tradeworx, a firm that uses super-fast computers to trade.
Narang's firm and others stopped trading on May 6 to avoid trades that would later be canceled. That can happen in times of extreme volatility, when the prices on some trades turn out to be wrong. Thousands of trades were indeed canceled that day. However, some analysts believe that by not trading, those firms accelerated the market's fall because they increased the vacuum of both buyers and sellers.
"I would've loved to have kept trading because we would've done great," Narang said.
Jacobs reported from New York.
CARACAS, Venezuela – Venezuela will ask U.S. authorities to hand over information about brokers suspected of laundering money through the South American nation's parallel currency market, President Hugo Chavez said Wednesday.
Chavez referred to a case in which 16 people were indicted in the United States on charges of laundering at least $7 million in drug trafficking profits through exchanges of Venezuelan currency for U.S. dollars.
Chavez said he believes some of the suspects are Venezuelans, and he suggested some could be linked to the dozens of brokerage firms in Venezuela that have been accused of violating currency trading regulations.
"Have them give us their names," Chavez instructed his foreign minister during a televised speech. "There are no untouchables here."
On Tuesday, Venezuelan regulators took over management at 31 of the country's 107 brokerage companies while investigating what officials say may be illegal currency-trading practices as well as money laundering and management problems.
The president of the securities commission, Tomas Sanchez, said in remarks published Wednesday by the newspaper El Universal that officials believe there has been significant money laundering and "speculative operations" through bond trading. Aides to Sanchez confirmed the statements.
Authorities temporarily halted trading of government bonds Tuesday and said they would seek to control currency exchange rates by setting a range of permitted prices in the bond market.
Chavez is seeking to crack down on currency trading that he blames for soaring inflation and the decline in the value of Venezuela's currency, the bolivar, on the previously unregulated bond market.
Venezuela maintains strict currency controls and sets official exchange rates, but another route for trading currency has been the bond market, where the bolivar has recently fetched about half the official rate of 4.30 to the dollar for nonessential goods.
In the past two weeks, authorities have intervened in and raided 13 other brokerages on suspicion of irregularities involving currency trading. Executives at the affected companies have not responded publicly to the measures.
During an evening speech, Chavez singled out one of the brokerages that have been seized — Positiva Sociedad de Corretaje — as an example of what the government alleges are shady business practices of some firms.
Chavez said the brokerage "made multimillion-dollar buying and selling operations of bonds since Jan. 1, 2010, without any legal or financial backing of the money, and without state control."
The firm's manager, Pedro Ramin, has been arrested, Chavez said.
Analysts say the government's decision to bar brokerage firms from the formerly lucrative bond market will dramatically reduce their business and could lead many to go out of business.
A coalition of opposition parties fiercely criticized Chavez's crackdown on brokerages, the government's decision to halt bond trading and its plans to tighten the Central Bank's control over the parallel market.
In a statement, the coalition expressed "concern regarding the paralysis of the exchange rules," saying Chavez's administration closed the market because "it doesn't have a clear strategy to reduce the panic that it has caused."
The opposition parties forecast food shortages in the future, noting that more than a third of Venezuela's import businesses used the parallel market to obtain hard currency needed to purchase goods from foreign suppliers.
"How can a market that provides 40 percent of the imports that Venezuelans consume be closed for two weeks? The government is now caught up within its own errors," the statement said.
Associated Press Writer Christopher Toothaker contributed to this report.
LOS ANGELES – Wal-Mart said Wednesday it is pulling an entire line of Miley Cyrus-brand necklaces and bracelets from its shelves after tests performed for The Associated Press found the jewelry contained high levels of the toxic metal cadmium.
In a statement issued three hours after AP's initial report of its findings, Wal-Mart said it would remove the jewelry, made exclusively for the world's largest retailer, while it investigates. The company issued the statement along with Cyrus and Max Azria, the designer who developed the jewelry for the 17-year-old "Hannah Montana" star.
Wal-Mart Stores Inc. had learned of cadmium in the Miley Cyrus jewelry, as well as in an unrelated line of bracelet charms, back in February, based on an earlier round of testing conducted at AP's request, but had continued selling the items. It said as recently as last month that it would be too difficult to test products already on its shelves.
In its statement, Wal-Mart did not say whether it would also remove the bracelet charms.
Exactly how many of the items have been sold was unclear. The charms — also available exclusively at Walmart stores — were sold under the name "Fashion Accessories," though Wal-Mart has not said when they began appearing on shelves. The Miley Cyrus jewelry hit stores in December.
Long-term exposure to cadmium can lead to bone softening and kidney failure. It is also a known carcinogen, and research suggests that it can, like lead, hinder brain development in the very young.
Cadmium in jewelry is not known to be dangerous if the items are simply worn. Concerns come when youngsters bite or suck on the jewelry, as many children are apt to do.
Wal-Mart said that while the jewelry is not intended for children, "it is possible that a few younger consumers may seek it out in stores."
"We are removing all of the jewelry from sale while we investigate its compliance with our children's jewelry standard," Wal-Mart said.
That was a reference to a policy Wal-Mart voluntarily implemented last month, under which suppliers are required to prove their products contain little cadmium, or else Wal-Mart would not accept them.
The company's policy of not checking products already on the shelves appears to have changed: In its statement, Wal-Mart said it reviewed children's jewelry and pulled "the few products that did not" comply with its new testing regimen.
Cadmium in children's jewelry became a public concern in January when the AP published the results of an investigation that showed items at Walmarts and other large chains were as much as 91 percent of the toxic metal by weight.
That testing was conducted by chemistry professor Jeff Weidenhamer of Ashland University in Ohio. In February, Weidenhamer was asked to provide to Wal-Mart headquarters detailed results of tests on items he bought at Walmarts as part of testing he had done for AP. Those items included 10 of the charms and three from the Cyrus line.
To judge the continued availability of pieces that Wal-Mart has known were contaminated, AP dispatched reporters throughout the country last month to buy any of the 13 items they could find. The packaging said they were made in China; all were bought for $6 or less.
All but one of the 13 were on store shelves in the eight states where AP reporters looked. Contrary to Wal-Mart's statement Wednesday, which said the Miley Cyrus jewelry was sold in the women's apparel section, AP reporters found the items either in the jewelry section or discount bins.
The items were then tested by Weidenhamer. Of 61 samples, 59 contained at least 5 percent cadmium by weight, with 53 of those measuring 10 percent or higher.
Weidenhamer's prior research has shown that the testing method he used — an X-ray gun that can roughly tell the amount of cadmium in an item — typically underestimates how much is present.
Representatives of the jewelry industry have argued that the presence of cadmium, even at high levels, is not by itself proof that an item is dangerous. The important thing, they say, is how much can escape if the item is sucked, bitten or swallowed.
Lab testing conducted by Weidenhamer at AP's request showed that several items easily shed the metal when exposed to a mixture that simulated human stomach acid.
The day after AP's original report, Wal-Mart said it was pulling two of the highlighted items — pendants with themes from the Disney movie "The Princess and the Frog." Within three weeks, the chain had agreed to recall all the pendants already sold.
Since then, federal regulators have issued two more recalls, for charm bracelets sold at the international jewelry chain Claire's and at a Dollar N More store. Last week, the agency's spokesman said there will be more recalls.
While AP's January investigation focused on jewelry clearly intended for children, the items tested for AP this time were labeled "not intended for children under 14 years." That is an important legal distinction: Under current law, children's items are defined as for kids 12 and under, and children's products are subject to regulations that others are not.
For reasons that are not fully understood, girls ages 6 to 11 — an age range that includes many fans of Cyrus' "Hannah Montana" TV show, movies and CDs — appear to be more at risk from cadmium.
Data from a major national study found that girls of that age absorb more cadmium than other children or adults, according to Bruce A. Fowler, a toxicologist with the Centers for Disease Control and Prevention.
The increased absorption could be because those girls typically have iron deficiency and their bodies grab on to cadmium as a substitute, Fowler said, or it could be because they encounter more of the metal in objects such as jewelry.
The importer of the bracelet charms, Cousin Corp. of America, said that earlier this year, it persuaded one of the Chinese factories with which it works to stop using cadmium. The cadmium-heavy jewelry Weidenhamer tested was produced in 2008 and 2009 at the problem factory, said Roy Gudgeon, vice president of merchandise at Florida-based Cousin.
"Our intention as a company is to never willingly cause harm to a child," he said.
Federal regulators' own research says that kids start becoming interested in making their own jewelry around ages 6 to 8. As for products featuring Cyrus, her fans include teenagers, tweens, even kindergartners.
Associated Press writers Briana Bierschbach in Minneapolis, Ben Dobbin in Rochester, N.Y., Ray Henry in Atlanta, David Mercer in Savoy, Ill., Kathleen Miller in Alexandria, Va., Thomas Peipert in Denver, Bob Salsberg in Boston, Terry Tang in Phoenix, and Michael Tarm in Chicago contributed to this report.