By Jay Heflin - 05/09/10 04:48 PM EDT
Senate Banking Chairman Chris Dodd (D-Conn.) said Sunday that his financial reform legislation would help protect U.S. markets from both last week's surprise Wall Street plunge and from the economic turmoil in Greece.
“We need to get in place our bill, have the president sign it, so we have the tools to protect our economy from these kinds of events,” he said on CBS' "Face the Nation."
“We would have a set of eyes, not just one set of eyes, at the Federal Reserve looking over the horizon,” he said.
Sen. Richard Shelby (R-Ala.) on Sunday said he was not sure if the near
1,000 point drop in the Dow last week was due to criminal or terrorist
“We’ll have to wait for forensic evidence,” he told "Face the Nation."
Since Thursday’s freefall in the Dow, reports have surfaced that criminals looking to game the system or terrorists wanting to instill fear might have hacked into the trading system and caused the market to plummet.
Dodd said the lack of “circuit breakers” in high-speed trading likely contributed to the freefall that occurred in the market.
“This may be the answer that we may discover,” he said.
The term circuit breaker refers to a series of safeguards that are triggered if the market encounters a sudden or continued drop in value. These breakers will close the market if the decline is severe.
In high-frequency investing, trades are largely based on mathematical calculations instead of intelligence gathered by investors. Trades in this arena are executed in a matter of milliseconds and do not have circuit breakers.
Dodd reasoned that investment activity migrated away from the New York Stock Exchange after its circuit breakers noticed a glitch in the system and slowed down trading. However, at the same time, high-speed trading escalated since there are no circuit breakers.
“That created this spiraling down very rapidly that we saw,” Dodd said. “It looks to me that may be what’s needed here; my sense is we need to look at this market-wide circuit breaker.”
Dodd plans to host a hearing on the subject soon.
Shelby agreed that a second look at high-speed trading is necessary to keep another collapse from happening in the market.
“I believe what has really happened is the technology has gotten a head of the regulation,” Shelby said. “And the regulations have got to get ahead of the technology.”