Regulators probe rapid stock plunge

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President Barack Obama said U.S. authorities were investigating the cause of a nearly 1,000-point plunge in the Dow Jones industrial average that left investors reeling.

"The regulatory authorities are evaluating this closely with a concern for protecting investors and preventing this from happening again, and they will make findings of their review public along with recommendations for appropriate action," Mr. Obama told reporters on Friday. He referred to the selloff as "unusual market activity."

In Canada, the stock market trading regulator is still looking into the violent plunge in shares and hasn't made a decision on whether to cancel trades en masse as is happening in the United States.

The Investment Industry Regulatory Organization of Canada, which oversees trading on Canadian stock markets, announced Friday afternoon it had re-priced or cancelled certain trades made between 2:40 and 3:10 p.m. on Thursday. The securities involved include:

Claymore Canadian Financial Monthly Income ETF (FIE.A): five trades were cancelled

• Fortis Inc. (FTS): 152 trades were re-priced and two trades were cancelled

Trades below $21.60 were re-priced to $21.60

• ISHARES S & P TSX CAPPED REIT INDEX FUND (XRE): 16 trades were re-priced and 5

trades were cancelled. Trades below $9.50 were re-priced to $9.50

• Inter Pipeline Fund (IPL.UN): 50 trades were re-priced

Trades below $9 were re-priced to $9.00

The organization said in a press release that in light of recent volatility, it will continue to closely monitor all trading on Canadian equity market places

The stocks meltdown stemmed from growing concern about the Greek debt crisis and was widely believed to have been exacerbated by at least one large erroneous trade. It sparked outrage among investors and politicians already up in arms over Wall Street's role in the global recession.

"We cannot allow a technological error to spook the markets and cause panic," Rep. Paul Kanjorski said late on Thursday. "This is unacceptable." A U.S. House of Representatives panel chaired by Kanjorski will examine the causes of the market swoon at a hearing next Tuesday.

The Securities and Exchange Commission probe will examine any wrongdoing related to the selloff, a source familiar with the matter said.

The SEC said on Thursday it was working closely with the Commodities Futures Trading Commission to review the unusual trading, which at its deepest point wiped nearly $1-trillion off equity values.

U.S. Treasury Secretary Timothy Geithner on Thursday held a conference call with Federal Reserve Chairman Ben Bernanke as well as with regulators from the SEC and the CFTC, a source said.

"Whatever happened yesterday in the beginning, there were wide consequences," said Ralph Cole, portfolio manager, Ferguson Wellman Capital Management of Portland, Oregon, whose firm manages about $2.5-billion. "High frequency and algo traders are an easy target, wrong or right, and they'll face more scrutiny."

The Dow fell as much as 279 more points in Friday morning trading but then rebounded. There was no sign of the kind of uncontrolled selling that wracked the market on Thursday. In the selloff, stocks like Accenture and Boston Beer plunged to just 1 cent per share.

The meltdown, which heightened calls for a crackdown on the computer-driven high-frequency trading that has come to dominate the market in recent years, also touched off sniping between the two largest U.S. stock exchanges.

Nasdaq OMX Chief Executive Robert Greifeld said the New York Stock Exchange's use Thursday afternoon of a lever that slows down floor trading was akin to abandoning its listed stocks.

"That signal is a negative signal that there is something wrong with (NYSE's) stocks. Instead of standing behind it, they basically walked away from that," Greifeld said on CNBC.

Duncan Niederauer, CEO of NYSE parent NYSE Euronext, defended the use of the so-called Liquidity Refreshment Point, which kicks in at pre-established times based on market activity.

"We think it's a valuable part of the model," he told CNBC. "My guess is regulators will take a look at this and say, if it's just 30 or 60 seconds, no one's walking away. We're simply slowing down the race car when we think it's dangerous."

Mr. Greifeld said Nasdaq OMX aims to take the lead in pushing for a market-wide circuit breaker based on individual stocks.

BATS Global Markets CEO Joe Ratterman, in a statement, also criticized NYSE's Liquidity Refreshment Point.

One bank linked by some investors to the erroneous trade rumours, Citigroup Inc., on Friday said there was no basis for rumors it was responsible for a massive trading error.

"Based on our review, rumours about a trading error by Citi are unfounded. It is troubling that inaccurate and unfounded rumours were spread as far as they were," Citi spokeswoman Shannon Bell said in an e-mail.

With Citigroup apparently out of the picture, many market participants were still left scratching their heads over what caused Thursday's meltdown. One senior portfolio manager at a large corporate pension plan speculated that the move could have been set off by an algorithm responding to a spike in the Japanese yen, first against the euro, then against the dollar.

That in turn may have touched off computer orders to dump large amounts of stock more or less instantaneously, the portfolio manager said.

"That set off a nuclear process of one order banging into the next and exploding," he said. "At the end of the day, the fault lies with poor programming and lack of intelligent human override."

The Nasdaq Stock Market early on Friday widened its list of stocks that will see canceled trades, and the focus turned to derivatives and regulators.

"It's a day that no one in the markets should be proud of," said William O'Brien, chief executive of Direct Edge, a trading venue operator that handles more than 10 per cent of all U.S. stock trading. "While a lot of regulation worked to mitigate the risks that became really evident yesterday, there's clearly more that we can do."

Like Nasdaq, Direct Edge wants a market-wide stock-specific circuit breaker.

Trades that took place during the worst of the meltdown will be cancelled for more than 250 stocks, Nasdaq OMX said, adding to the long list of "busted" transactions on NYSE Euronext's Arca, other exchanges and trading venues.

The unusual exchange-wide agreement to cancel trades in stocks raised questions for futures and options markets, where many contracts are based on underlying stocks and stock indexes.

U.S. options exchanges also broke trades based on underlying equities, although the volume of busted trades was "deminimis," said a spokesman at the Options Clearing Corp. A record number of options contracts traded on Thursday.

At least one high-frequency trading firm said it stopped trading during the worst of the selloff, raising questions about the reliability of the all-electronic market-makers that provide much liquidity in today's markets.

With a file from reporter Boyd Erman