Global regulators set out proposals to stop 'flash crashes'

By Huw Jones

LONDON (Reuters) - Stock exchanges should talk to each other and have safeguards in place to mitigate bouts of extreme market volatility that can undermine investor confidence, global securities regulators proposed on Wednesday.

So-called "flash crashes" and "taper tantrums" - when stocks and bonds in the United States and Europe have suffered huge, rapid falls - have prompted investors en masse to ask for their money back from bond funds, setting off another wave on instability.

The International Organisation of Securities Commissions (IOSCO) set out draft recommendations for public consultation on Wednesday to stop big market moves becoming disorderly.

Changes have already been made nationally in recent years, but IOSCO aims for a more consistent approach across financial markets and to share best practices.

IOSCO, whose members include the U.S. Securities and Exchange Commission, Japan's Financial Services Agency and Germany's BaFin, said the use of automated trading had grown in recent years.

"At the same time, there have been events of extreme, including abnormal, volatility in financial markets," IOSCO said in a statement.

It proposed trading venues like exchanges should have mechanisms to manage extreme volatility, though this could differ according to asset class and how much they are traded.

While exchanges have already introduced controls such as trading halts, or only allowing orders within certain price bands, IOSCO said these must be regularly reviewed and tweaked to reflect market changes.

Regulators, market participants and, if appropriate the public, should be told when the mechanisms are triggered.

"Communication amongst trading venues should be considered where the same or related securities are traded on multiple trading venues in a particular jurisdiction," IOSCO proposed.

(Reporting by Huw Jones; Editing by Mark Potter)