Dodd: Wall St. Detached From "Real Economy"

There has been no clear determination as to what caused Thursday's remarkable drop in the Dow Jones Industrial Average - - in the midst of positive economic news on job growth.

But the Chairman of the Senate Banking Committee said that with high-speed automatic trading, it was a sign that on Wall Street today, "finance is getting detached from the real economy."

Appearing on CBS' "Face the Nation" this morning, Sen. Chris Dodd, D-Conn., said that automated programs that can make trades in microseconds not only put ordinary investors at a disadvantage but also help feed a "casino environment."

The idea behind high-speed trading, Dodd said, was to "create greater fairness, take emotion out of trading, would work well for investors. It's all math-driven. What it didn't calculate is that, of course, when panic sets in and there's a lack of liquidity [or] depth in these markets and a lack of circuit breakers in all exchanges … what happened in the midst of this is the New York Stock Exchange began to slow down," acting like a circuit breaker.

"They realized something was happening; this was not market-wide. You didn't have the circuit breakers in the other exchanges," Dodd said. "You had a migration to these vast, high-speed computers in currencies, in treasury bonds and the like. That created this spiraling down very rapidly that we saw."

He said he would have hearings right away on the need for market-wide circuit breakers, and promoted a bill he was working on with the ranking member of the Banking Committee, Sen. Richard Shelby of Alabama, to deal with systemic risk in the financial markets.

"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," Dodd said.

Likening Thursday's Wall Street tumble to a science fiction film where the robots take over, host Bob Schieffer asked Shelby if it could have been disastrous.

"Absolutely, Bob, very serious," Shelby replied. "I don't know if they're robots but they're mathematicians. What they're doing, they're setting these programs up and they trigger at different levels," with a lot of trades done off the exchange.

"I believe what's really happened is the technology has gotten ahead of the regulators," Shelby said, "and the regulators have got to get ahead of the technology." Otherwise, he suggested, there would be more such events.

He suggested the lack of proper safeguards meant we "could have had a real catastrophe financially."

Dodd said the Wall Street in the midst of "some of the best economic news in years" is a peculiar conundrum: "What you're getting is finance is getting detached from the real economy, so you are getting sort of this casino environment that's appearing in our markets. It does not reflect what's going on in the real economy. You would have expected Thursday and Friday with good news coming up that the market would have been reacting to that news. Instead, of course, we had a market tumbling out of control for 17 minutes, dropping 1,000 points because we didn't have [safeguards] in place."

He said the Securities and Exchange Commission needs to step up very quickly to let Congress know what happened and what steps need to be taken.

"I don't think you need legislation in this area," Dodd said. "My guess is, you need the regulators to step up" in the area of high-frequency, "flash" trading.

Shelby said there was no evidence to suggest that Thursday's drop was a calculated cyber-attack (there have been reports it was precipitated by a trader's errant finger transposing a billion for a million), but added that high speed trading brought a high risk that something could go wrong. "Once it really goes wrong, it could be catastrophic," Shelby said.