Senator Warner and Delaware Senator Ted Kaufman proposed an addition to the Senate's Wall Street reform bill that would direct the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission to report to Congress on several of the key issues surrounding yesterday's market meltdown.

High-frequency-trading algorithms have been the initial focus of questions concerning the brief and rapid sell-off, which sent the Dow Jones Industrial Average tumbling dramatically in mere minutes.

Senators Warner and Kaufman both spoke on the Senate floor on Thursday, after the market's drop and recovery, to highlight the issue

According to the Associated Press, Senator Warner said on the floor: 

"We saw a living, breathing, real-time example today of the potential catastrophe that takes place if we don't have an ability to make sure we adequately use this technology," Warner said late Thursday. "We must have safeguards and really realize how some of these firms are using this technology to get an advantage over the everyday main street investor."

In a joint letter sent to Senate Banking Committee Chairman Chris Dodd today, the two senators wrote:

"A temporary $1 trillion drop in market value is an unacceptable consequence of a software glitch. ... We are concerned that as markets rely on and entrust such a high percentage of the capital management of the market to black-box trading systems that systemic problems may be created."

The Kaufman-Warner addition would direct the SEC and CFTC to report to Congress within 60 days of the enactment of the Wall Street reform bill the following:

• The causes of the May 6 market dive;

• How the SEC can evaluate whether the proprietary trading activities of major banks employ algorithmic trading practices that represent potential systemic risks to the markets;

• The potential need for industry-wide pre-trade operational risk controls that would minimize the incidence and magnitude of any trading errors;

• How the agencies can gain analytical assistance from academics and private analytic firms under controlled conditions to conduct analyses on whether certain algorithmic trading strategies are harmful to the interests of long-term investors; and

• How the agencies intend to “tag” high frequency traders over a certain volume threshold and use the data collected to gain a better baseline understanding about high frequency trading activities.

The Kaufman-Warner addition would also direct the SEC and CFTC to report to Congress within 180 days on the following:

• Whether the agencies should insist on “shock absorber” or circuit breaker mechanisms to prevent computer-driven trading from running amok without the intervention of human judgment;

• How the agencies intend to “tag” high frequency traders and use data collected about high frequency trading activities, along with a consolidated audit trail, to detect any manipulative trading strategies; and

• Whether certain electronic liquidity providers which are currently unregulated but purport to be acting like market makers should be required to maintain “fair and orderly markets.”

You can read their letter below:

Warner/Kaufman Ltr on May 6th market activity