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SEC: Exchanges agree in principle to new rules

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WASHINGTON — The leaders for major securities exchanges have agreed in principle to a uniform system of "circuit breakers" that would slow trading during periods of intense market volatility, Federal regulators said Monday.

The heads of the biggest exchanges "agreed on a structural framework, to be refined over the next day," Securities and Exchange Commission Chairman Mary Schapiro said.

The agreement has been reached by leaders of six exchanges, including the New York Stock Exchange and NASDAQ.

The absence of a uniform system is being looked at as a possible trigger for last week's historic stock market plunge.

In an effort to calm Thursday's rapid market swings, the New York Stock Exchange invoked a measure to slow trading. Some analysts believe that drove trades onto other electronic exchanges, which didn't slow trading. That left fewer buyers and sellers to help set prices, potentially accelerating Thursday's drop.

Financial regulators met with the heads of major exchanges to discuss how conflicting trading rules may have contributed to the market's fall. The meeting was set to continue Monday afternoon with Treasury Secretary Timothy Geithner.

Meeting participants were weighing possible solutions to reconcile the often-conflicting rules written and enforced by different exchanges. Several exchanges, including NYSE and NASDAQ, already have circuit breakers that slow trading when stocks move too fast in either direction. Yet the trigger for those circuit breakers varies from exchange to exchange. That discrepancy can disrupt markets if some exchanges slow trading and others don't, as happened on Thursday.

Streamlining the rules for triggering circuit breakers could prevent another chaotic market drop. One possibility being discussed is for exchanges to simultaneously slow trading of a specific stock if its price moves too quickly, according to a person with knowledge of the talks. Exchanges also are discussing whether the trigger for slowing trading should be based on the rate of percentage change in the value of a stock or its trading volume, according to the person, who spoke on condition of anonymity because he wasn't authorized to publicly discuss the matter.

Regulators and exchanges have been poring over data from millions of trades trying to pinpoint what caused Thursday's massive, computerized sell-off, which at one point had the Dow Jones Industrial Average down by nearly 1,000 points. The Dow later recovered to close the session down 342 points.

The SEC is leading the investigation with the Commodity Futures Trading Commission. Those agencies are ultimately responsible for overseeing markets, but they rely heavily on exchanges to write and enforce their own rules. And the exchanges' rules vary widely, prompting top lawmakers to call for greater consistency.

Sen. Charles Schumer, a New York Democrat and member of the Senate Banking Committee, urged the exchanges to adopt systemwide circuit breakers.

"It appears that our fragmented market structure may very well have contributed to the difficulties we experienced last Thursday. Coordination and consistent safeguards between trading venues — and across markets — is essential," Schumer said in letters to Schapiro, CFTC Chairman Gary Gensler and the heads of all the major stocks and futures exchanges.

Schumer also asked the SEC to put in a new centralized market surveillance system to watch for risk and manipulation across all exchanges and trading platforms.

As regulators seek to understand the root cause of Thursday's dive, they again are relying on the exchanges — this time to flag suspicious trades and help the SEC narrow the focus of its probe.

One reason: Market-wide trading data is not collected in a single location. Instead, each exchange's trades are reported to its designated self-regulator — often part of the same company that owns the exchange.

Regulators now believe the disruption was caused by a toxic, not-yet-understood, feedback loop created when multiple trading schemes interacted, according to people familiar with the situation. That contradicts earlier speculation that the trigger was a small number of erroneous trades.

That means it could take weeks to sort out the problem, said the people, who spoke on condition of anonymity because they were not authorized to discuss the investigation.

High-frequency trading uses mathematical models and computers to buy and sell huge numbers of shares in milliseconds. It accounts for two-thirds of all stock trading in the U.S., and proponents say it makes the stock market run more smoothly by efficiently connecting buyers and sellers.

On Capitol Hill Tuesday, Rep. Paul Kanjorski, D-Pa., will hold a hearing into Thursday's market activity. Kanjorski's subcommittee — which is responsible for overseeing and crafting legislation on capital markets — hasn't held a hearing on flash trading to this point.

Schapiro and Gensler will appear together at the hearing, as will key executives from the NYSE, Nasdaq and Chicago-based CME Group Inc.

The Senate subcommittee that oversees financial markets is preparing to hold its own hearing on the matter in the coming weeks, said a spokesman for Chairman Sen. Jack Reed, D-R.I.

Stocks rocketed higher Monday after European leaders agreed to a nearly $1 trillion rescue plan to avoid a major debt crisis and the U.S. Federal Reserve said it would also provide loans overseas. The Dow Jones industrial average rose more than 340 points in afternoon trading.

Wagner reported from Washington. AP Business Writer Marcy Gordon and Associated Press Writer Jim Kuhnhenn contributed to this report.