WASHINGTON — As a doctoral candidate in physics at Princeton two decades ago, Gregg E. Berman spent a year and a half in a laboratory searching through subatomic data for an elusive particle called the heavy neutrino.

Now, from his small office at the Securities and Exchange Commission here, the former physicist is busy completing a similarly painstaking task, supervising a team of more than 20 investigators who have spent the last five months scrutinizing reams of stock-trading data and hundreds of interview transcripts in an effort to figure out why stock prices went into free fall for 20 terrifying minutes on May 6.

Their long-awaited report on the so-called flash crash, in partnership with the Commodity Futures Trading Commission, is due to be published in the next two weeks.

Mr. Berman, 44, will not say exactly what will be in the report, but he says that it will not simply restate what regulators have already said — that markets were volatile because of worries over the debt crisis in Europe, causing some computerized trading programs to stop trading, and finally causing computers on other exchanges to misread the pullback as a rapid bidding down of stock prices.

Instead, he says, the report will zero in on a specific sequence of events that preceded the crash. He says it will tell a clear story about what happened in the markets on that stomach-churning day, beyond simply pointing a finger at the perils of the kind of high-speed computer trading that dominates today’s markets.....

Brokerages overwhelmed by plunging prices on May 6 were forced to send sell orders from individuals to public exchanges instead of processing them internally, causing at least 50 percent of the canceled trades that day, according to U.S. regulators.

“Internalizers instead routed orders to the exchanges, putting further pressure on the liquidity that remained in those venues,” the Securities and Exchange Commission and Commodity Futures Trading Commission said in a report released Oct. 1 that detailed the causes of the rout. They did this because of selling pressure from retail customers, an unwillingness to trade and questions about the accuracy of market data given the speed of the decline, the document added.

More than 20,000 trades representing 5.5 million shares were executed at prices 60 percent or more away from levels from before the crash, the SEC and CFTC said. Of the broken transactions, one brokerage and a single market maker accounted for about half of the executions, they added. The firms weren’t identified.

The 104-page report on the crash that briefly erased $862 billion from U.S. shares in less than 20 minutes before they recovered most of their losses explains for the first time the degree of involvement by brokers called internalizers. They usually trade in their own accounts against orders from so- called discount brokerages.....

The U.S. Securities and Exchange Commission banned a market-maker pricing practice known as stub quotes, prohibiting a technique that caused shares to trade as low as 1 cent during the May 6 crash.

Stub quotes are placeholders provided by market makers to satisfy a regulatory obligation to submit both bids and offers. Transactions aren’t meant to occur at those levels, which are at prices such as a penny or thousands of dollars. On May 6, when a 20-minute rout briefly erased $862 billion in value before stocks rebounded, companies such as Accenture Plc tumbled as traders pulled out of the market, leaving only stub quotes. The SEC announced the ban today.

“We won’t have problems like we saw on May 6 where the only bid was for one penny and the only offer for $1,000,” said Justin Schack, a director in market structure analysis at Rosenblatt Securities Inc. in New York. “The new rule doesn’t necessarily address all the problems related to brokers’ order routing practices that were revealed on May 6,” Schack added.

The SEC mandated that market makers’ quotes be within 8 percent of the national best bid or offer, known as the NBBO, according to a statement e-mailed today. The rule begins Dec. 6.....

(Reuters) - News that computer hackers had infiltrated the operator of the Nasdaq Stock Exchange is the latest blow for Wall Street as it works to repair an image with investors and traders dented by last year's "flash crash...."

High-frequency trading has been a powerful and growing force in the market in recent years, accounting for more than half of all trading volume in U.S. stocks. Its advocates say it makes markets more efficient and brings down costs for most investors.

Mr. Peterffy agrees that high-frequency trading does bring some benefits. But he argues that it can make it harder for large firms such as Interactive to make markets.

High-speed traders' flighty nature can lead to big swings, Mr. Peterffy says, such as the computer-driven "flash crash" on May 6, 2010, when the Dow Jones Industrial Average fell about 1,000 points before rebounding. The Securities and Exchange Commission in a report said the flash crash was worsened when a large number of high-frequency traders sold their positions, pushing stocks down further, before they pulled out of the market altogether.

Mr. Peterffy saw similar behavior in August, when the market swung wildly amid fears of the debt crisis in Europe. Many high-frequency firms stopped trading, he says, putting Interactive Brokers in a vulnerable position as its market-making firm often operated in a vacuum.

High-frequency traders are "fair-weather market makers," he said in an interview. "When the markets came under serious stress [in August], we felt like we were standing on the precipice by ourselves, staring into the abyss....."

By the time the updated programs are in place, almost three years will have passed since the flash crash. Selway said the SEC took too long to approve the changes.

“The initiatives we approved are the product of a significant effort to devise a sophisticated, yet workable and effective way to protect our markets from excessive volatility,” SEC Chairman Mary Schapiro said in the statement. “In today’s complex electronic markets, we need an automated and appropriately calibrated way to pause or limit trading if prices move too far too fast.”

Under the limit-up/limit-down system, which will replace the current practice of immediate halts when prices for individual securities become volatile, trades won’t be allowed to take place more than a specified percentage above or below the average price over the preceding five-minute period. If trading isn’t able to occur within the price band for more than 15 seconds, a five-minute halt will ensue, the SEC said......

The U.S. has the most sophisticated financial markets in the world, yet they can unaccountably spin out of control at a moment’s notice.

The latest case involves Knight Capital Group Inc. (KCG), a securities-trading company in Jersey City, New Jersey, that was laid low by one of its inadequately tested computer-trading programs. In less than an hour on Aug. 1, the program entered incorrect bids for about 150 stocks into the interconnected electronic marketplace. Computer programs at other firms sniffed out the errors and traded against Knight. By the end of the day, the company was out $440 million, forcing it to seek outside financing to survive.

This debacle highlights a market weakness that regulators have been unable to address because high-frequency trading has raced ahead of the humans who try to contain the mischief it can cause.....

By SCOTT PATTERSON and JENNY STRASBURG

Haim Bodek was a Wall Street insider at Goldman Sachs GS -0.72% and UBS UBSN.VX -0.08% before launching his own trading firm. Now he is taking on the financial establishment that spawned him.

Mr. Bodek approached the Securities and Exchange Commission last year alleging that stock exchanges, in a race for more revenue, had worked with rapid-fire trading firms to give them an unfair edge over everyday investors.

He became convinced exchanges were providing such an edge after he says he was offered one himself when he ran a high-speed trading firm—a way to place orders that can be filled ahead of others placed earlier. The key: a kind of order called "Hide Not Slide."

The encounter set off an odyssey for Mr. Bodek that has fueled a sweeping SEC inquiry into the activities of sophisticated trading firms and stock-exchange operators.....