Stocks & Markets 
 
 President Barack Obama's tough talk against Wall Street rattled stocks on Jan. 21. And, market observers warn, this could be just the beginning of a tough political year for investors. 
 
 It was Obama's tone as much as his proposal—to limit growth and risk-taking by big financial institutions—that raised eyebrows. The plan would prohibit banks from running proprietary trading operations or investing in hedge funds and private equity funds. 
 
 News of Obama's plan arrived before the stock market opened Jan. 21, but the broader indexes and affected bank stocks headed solidly lower when Obama actually stepped to the podium before 12:00 p.m. ET. Speaking of the "army of lobbyists" fighting tighter financial regulations, Obama said, "If these folks want a fight, it's a fight I'm ready to have." 
 
 The broad Standard & Poor's 500-stock index ended the day down 1.9% to 1116.48, its second consecutive day of steep losses. Wall Street investment bank Goldman Sachs (GS), which reported a record quarterly profit on Jan.21 fell 4.1% to 160.87, while JPMorgan Chase (JPM) dropped 6.6% to 40.54 and Bank of America (BAC) lost 6.2% to 15.47. 
 
 "We knew the regulatory environment would provide a headwind for the market as we got closer to the 2010 election," says Quincy Krosby, Prudential Financial (PRU) market strategist. But the Jan. 19 victory by Republican Scott Brown in the Massachusetts Senate contest seems to have ramped up the political risk for shareholders, she says. By eroding Democrats' chances of easily approving health-care reform, the election seems to have prompted Obama to take aim at politically unpopular Wall Street instead. 
 
 The Upheaval of Uncertainty 
 
 When asked, many market experts say they do favor some form of financial regulation. The problem for investors and traders is not so much the proposals themselves, but the uncertainty they create while under discussion. 
 
 "The market hates uncertainty, [and] any horse-trading involved in passing legislation introduces uncertainty," says independent market strategist Doug Peta. A prime example is health-care insurers, who have seen their stocks hurt by Washington's ongoing discussion of health-care reform. Market participants, who tend to be politically conservative, also fear the impact of government regulations on profits and economic growth. "In general, the market would prefer the government stay out of it," Peta says. 
 
 The last 10 months have been good to financial stocks, as many banks, helped by low interest rates and rising markets, have returned to profitability. For traders, Krosby says, "the immediate reaction [on Jan. 21] was: Take profits now, ask questions later." 
 
 Eventually, the market may appreciate Obama's tougher approach, says Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac , who believes the proposed changes could over the long term "shore up the integrity of the system." 
 
 But, on Jan. 21, the market appeared to show a more emotional, knee-jerk reaction to Obama's plan, he says. "It's like a child who is being told not to do something," Hirsch says. " 'Don't take my toy away'—that's a natural reaction." 
 
 Frank: Regulation Implemented Slowly 
 
 Obama's six-minute address left traders and investors searching for information on how the proposal would affect financial stocks, says Dave Rovelli, managing director of equity trading at Canaccord Adams. "Who is going to come in and buy a financial stock…if they don't know what the rules are going to be?" he says. 
 
 At least some uncertainty was lifted when House Financial Services Committee Chairman Barney Frank (D-Mass.) told media any regulation would be implemented slowly, perhaps over five years. Otherwise, he told Bloomberg TV, "you create fire-sale conditions," in which banks are forced to sell off assets quickly. "We are aware that you don't want to be doing it all at once." 
 
 Frank even said he expected Goldman could skirt the new rules by simply ending its status as a bank holding company. After his comments, financial stocks rebounded a bit. 
 
 Obama's proposal wasn't the only reason markets fell on Jan. 21. In Asia, many investors were worried about a potential overheating of China's economy, and efforts by its government to slow down growth. After significant gains in the last two months, some technical analysts were telling traders the market was due for a pause. 
 
 It can be a mistake to attribute too much stock market impact to political events. "It may have some short-term effect here and there," says Richard Sparks of Schaeffer's Investment Research. The effects are often limited to particular sectors, like health care or financials. And, Sparks says, "over the longer term, earnings are going to be the engine that drives the market." 
 
 Other big factors influencing stocks include economic data, the U.S. jobless rate and the direction of interest rates set by the Federal Reserve. 
 
 Wall Street vs. Washington 
 
 Still, the stock market seems to have entered a period when discussions in Washington have taken on added significance. "There is a lot of political risk because the [country's] problems are so big," says John Merrill, chief investment officer at Tanglewood Wealth Management. The government has spent decades avoiding fiscal problems, for example. "This is a can that's been kicked down the road for years," he says. 
 
 The market's Jan. 21 sell-off may be a one-day blip, the reaction to a proposal that—if financial industry lobbyists have their way—may never become law. But it is also a reminder that the factors affecting the stock market are changing. With a fresh wave of regulation looming—and investment bankers the political bad guys of the moment—Wall Streeters will no longer find Washington such a hospitable place. ||||| Reuters Specialist traders on the New York Stock Exchange floor during the record intraday point decline. The Dow is back at its March 4 level. 
 
 A bad day in the financial markets was made worse by an apparent trading glitch, leaving traders and investors nervous and scratching their heads over how a mistake could send the Dow Jones Industrial Average into a 1,000-point tailspin. 
 
 At its afternoon low, the Dow had plummeted 998.50 points, its biggest intraday point drop ever. The swing from its intraday high was 1,010.14 points. 
 
 The Dow eventually rebounded to close down 347.80 points, or 3.2%, at 10520.32, its worst percentage decline since April 2009. Stocks from Dow components Procter & Gamble and 3M suffered precipitous declines. At one point shares of P&G tumbled 37%. 
 
 The markets were already on edge before the midafternoon collapse as traders watched televised scenes of rioting in Athens following the Greek government's approval of its portion of the European Union and International Monetary Fund bailout. The euro had tumbled to a new 14-month low and credit markets were showing signs of strain in Europe and the U.S. 
 
 Throughout the day, markets around the globe posted big declines as investors reacted with disappointment to the failure of the European Central Bank to signal any heightened concern about the spiraling Greek debt crisis. 
 
 Standard & Poor's 500-stock index dropped 3.2% to 1128.15 Bond, commodity and currency markets were all roiled as investors fled from risky assets toward the safety of gold and Treasurys. 
 
 The Chicago Board Options Exchange Volatility index, or VIX, which tracks volatility in stock-index options, at one point soared 60% to nearly 40 and ended the day up nearly 32%. 
 
 Asian markets immediately opened down Friday. Japan's Nikkei fell more than 4% and Australia's S&P/ASX 200 fell more than 3%. 
 
 After the gyrations, President Barack Obama was briefed by Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers on the situation in U.S. financial markets and the latest moves in Europe to cope with the debt crisis. An administration official said they discussed market structure and the government agencies looking into the crisis and its potential impact on the U.S. economy. 
 
 Dow Regains Some Ground View Slideshow Getty Images A man walks outside the New York Stock Exchange. 
 
 Traders were stunned by the sudden sharp moves. Regulators and exchanges announced probes into what they called unusual market activity. 
 
 "It was absolute chaos," said Steven Starker, co-founder of brokerage firm BTIG LLC, who said the trading in the volatile half-hour reminded him of the selloff during the market crash in October 1987. 
 
 "You sit there and stare at the screen and don't quite know what to make of it," said Mike Ryan, the chief investment officer for UBS Wealth Management Americas. 
 
 Representatives of major U.S. exchanges and the Securities and Exchange Commission convened an emergency conference call late Thursday to examine potentially erroneous trades in multiple stocks. The trades took place between 2:40 p.m. and 3:00 p.m. EDT, according to a notice from Nasdaq OMX Group Inc. Officials late in the day said any trades that were 60% away from the market price at 2:40 p.m. would be canceled. 
 
 About 300 stocks are expected to see canceled trades, but it is unknown how many trades would be broken. No exchange admitted on the conference call that it had seen trades mis-keyed into their systems, one exchange official said. 
 
 Interactive Graphic 
 
 Drawing particular attention were stocks that posted far bigger losses than the broad market. At least eight in the Standard & Poor's 1500-stock index fell to a price of one cent per share—essentially a 100% decline. Among them were Boston Beer, Exelon and Accenture. 
 
 With Accenture, for example, 20,365 shares changed hands at around $39.98 during the minute of 2:46 p.m., then another 68,516 shares were traded at $38 per share during the minute of 2:47. But then in the 2:49 p.m. minute, 66,277 shares traded at one cent. By 2:50 p.m., the stock was back up to $39.51. 
 
 Several more stocks dropped by more than 60%. Among the stocks in the S&P 1500, 15 stocks fell more than 50% from their day's high to their low and 61 stocks fell more than 20%. 
 
 Traders theorized that an initial trading error triggered a piling-on effect from computerized trading programs designed to sell when the market moves lower. At the same time, pre-set orders form individual traders and investors to sell on declines during market downturns were likely triggered. 
 
 PM Report: Stocks Plunge, Fear Returns 9:41 The News Hub panel -- Neal Lipschutz and David Wessel in New York and Dave Kansas in London -- discuss today's market plunge. 
 
 The volatile moves in many stocks likely triggered a wave of additional trades as hedges such as limit orders and options strategies kicked in. That could have caused the market to plunge further. 
 
 Among the big losers in the selloff were likely to be investors who had put limit orders on stocks they held. If an investor had placed a limit order with his broker to sell his P&G shares if the price fell to $50, then that sell order would have been triggered as the stock tumbled to its low of $39.97. The investor would have lost money on that sale and then lost again when the stock rebounded back to close at $60.76. Worse, if the investor had held the stock for a long time and had a gain, he would be hit with a tax bill on his profits. 
 
 Accelerating the declines, high-frequency hedge funds, which use computers to trade at super high speed, appeared to pull back from the market as prices collapsed. These hedge funds have grown to account for a significant amount of trading volume, and their absence likely created a void into which prices fell. 
 
 The move highlighted how fragile U.S. markets have become and how the various fragmented markets have deficiencies in the way they buffer volatility. 
 
 "This highlights the risks of electronic trading," says Louis Pastina, executive vice president and head of operations at NYSE Euronext's New York Stock Exchange. "When you have low volatility, electronic trading works very well. But there are risks. It highlights the need for human-based intervention." 
 
 Before the focus moved to the U.S. stock market, all eyes were on Europe, where investors bailed out of stocks, bonds and the euro. 
 
 Even as the Greek parliament approved the 110 billion euro ($145 billion) package, the common currency was falling to $1.2629, its lowest level since last March against the U.S. dollar. 
 
 European bond markets also reacted with big price declines on heavily indebted countries. The yield on Portuguese 10-year notes jumped to a new crisis high of 6.33%, with the spread over German 10-year notes rising by 3.5 percentage points. 
 
 In the U.S., credit markets were also weak early in day Thursday. U.S. corporate bonds also declined sharply, though in a more orderly fashion than the stock market. 
 
 Investment-grade bonds at one point during the day were suffering a deeper selloff than at the worst of the Lehman Brothers crisis, according to Tim Backshall, chief strategist at Credit Derivatives Research. High-yield bonds had their worst day since 2007. 
 
 But the selloff in credit has been building slowly for days, suggesting to some that the market turmoil may not be over. At the very least, there is a growing chance that a record rally in corporate debt that began at the height of the credit crisis in 2008 may be entering a new, uncertain phase. 
 
 Credit-market indicators that reflect jitters about short-term lending to banks have been creeping higher for several days. The London interbank offered rate, at which banks lend money to each other, rose on Thursday to 0.37%, its highest level since last August, a sign that short-term cash is becoming scarcer for banks. Market observers said banks in Europe were starting to have a hard time selling commercial paper and other assets in the market to meet funding needs, a chilling callback to the credit crisis in the U.S. 
 
 Libor and other fear indicators are nowhere near as high as at the height of that crisis, when Libor soared to more than 5%, but were wide enough to start to draw attention. 
 
 Investors fled to the safety of U.S. Treasury debt. The 10-year note's yield fell to 3.4%, the lowest level of the year. 
 
 —Dan Fitzpatrick Neil Shah, Donna Kardos Yesalavich, Kristina Peterson and Aaron Lucchetti contributed to this article. 
 
 Biggest Dow Drops Below are the biggest closing point drops in the history of the Dow Jones Industrial Average. Date Close Points/% 9/29/2008 10365.45 -777.68/-6.98% 10/15/2008 8577.91 -733.08/-7.87% 9/17/2001 8920.70 -684.81/-7.13% 12/1/2008 8149.09 -679.95/-7.70% 10/9/2008 8579.19 -678.91/-7.33 Source: WSJ Markets Data Group 
 
 Write to Tom Lauricella at tom.lauricella@wsj.com and Peter A. McKay at peter.mckay@wsj.com ||||| With Wall Street banks having already shut proprietary trading desks in anticipation of the Volcker rule, its impact rests largely on how regulators deal with other banking activities. 
 
 With Wall Street banks having already shut proprietary trading desks in anticipation of... Read More 
 
 With Wall Street banks having already shut proprietary trading desks in anticipation of the Volcker rule, its impact rests largely on how regulators deal with other banking activities. Close 
 
 Wall Street faces more intensive government scrutiny of trading after U.S. regulators issued what they billed as a strict Volcker rule today, imposing new curbs designed to prevent financial blowups while leaving many details to be worked out later. 
 
 The Federal Reserve, Federal Deposit Insurance Corp. and three other agencies formally adopted the proprietary trading ban. The rule has been contested by JPMorgan Chase & Co., Goldman Sachs Group Inc. and their industry allies for more than three years. 
 
 Wall Street’s lobbying efforts paid off in easing some provisions of the rule. Regulators granted a broader exemption for banks’ market-making desks, on the condition that traders aren’t paid in a way that rewards proprietary trading. The regulation also exempts some securities tied to foreign sovereign debt. 
 
 At the same time, regulators said the final version imposed stricter restrictions on hedging, providing banks less leeway for classifying bets as broad hedges for other risks. To pursue a hedge, banks would need to provide detailed and updated information for review by on-site bank supervisors. 
 
 Limiting Risks 
 
 “This provision of the Dodd-Frank Act has the important objective of limiting excessive risk-taking by depository institutions and their affiliates,” Fed Chairman Ben S. Bernanke said in a statement. “The ultimate effectiveness of the rule will depend importantly on supervisors, who will need to find the appropriate balance while providing feedback to the board on how the rule works in practice.” 
 
 Photographer: Scott Eells/Bloomberg The New York Stock Exchange in New York. Close The New York Stock Exchange in New York. Close Open Photographer: Scott Eells/Bloomberg The New York Stock Exchange in New York. 
 
 The Volcker Rule Explained 
 
 The Fed and FDIC voted unanimously to adopt the rule. The Securities and Exchange Commission and Commodity Futures Trading Commission votes split on party lines, with Republicans criticizing the rule-making process as flawed. Comptroller of the Currency Thomas Curry adopted the rule on behalf of his agency with a signature. 
 
 The Fed gave banks a delay until July 21, 2015, to comply with the rule. Beginning June 30, 2014, banks with $50 billion in consolidated assets and liabilities must report quantitative information about their trading. 
 
 The rule is named for Paul Volcker, the former Fed chairman credited with taming rampant inflation in the 1970s and who served as a top adviser to President Barack Obama. Volcker, 86, proposed the ban as a means of restoring stability to Wall Street following the 2008 financial crisis, arguing that banks that benefit from federal deposit insurance and discount borrowing shouldn’t be permitted to take risks that could trigger a taxpayer-funded government bailout. 
 
 Dodd-Frank Act 
 
 The rule, enshrined by the Dodd-Frank Act of 2010, allows exemptions for market-making and some hedging, and defines limits for banks’ investments in private equity and hedge funds. The version issued today is 71 pages long, with an additional 850-page preamble. 
 
 “This rule is so complex and massive that it is essential that the regulators not conflate inadvertent mistakes with purposeful violations,” H. Rodgin Cohen, senior chairman of the Sullivan & Cromwell LLP law firm, which represents Wall Street banks, said in an e-mailed statement. 
 
 With Wall Street banks having already shut proprietary trading desks in anticipation of the rule, its remaining impact rests largely on the fine print and on how regulators conduct oversight of other banking activities, primarily market-making and hedging. 
 
 $44 Billion 
 
 Wall Street’s five largest firms had as much as $44 billion in revenue at stake on the outcome of just the market-making provision, according to data for the year ended Sept. 30. JPMorgan, the biggest U.S. lender by assets, had as much as $11.4 billion riding on the answer. 
 
 Goldman Sachs rose 1.4 percent to $170.05 at 2:44 p.m. in New York. Morgan Stanley climbed 1.4 percent to $30.80, and JPMorgan increased 0.5 percent to $56.77. Bank of America Corp. fell 0.1 percent to $15.56. 
 
 Business groups, which have sued to overturn several Dodd-Frank rules based on the quality of regulators’ economic analysis, have signaled that they may challenge the Volcker rule in court. 
 
 “We will now have to carefully examine the final rule to consider the impact on liquidity and market-making, and take all options into account as we decide how best to proceed,” David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said in a statement. 
 
 Cost-Benefit Analysis 
 
 The SEC, which typically provides an economic analysis for each of its rules, didn’t conduct a separate cost-benefit analysis for Volcker because regulators said they wrote the rule under a banking law that doesn’t require it. 
 
 “Comments on the potential economic effects of the Volcker rule were particularly important in shaping revisions that have produced a more tailored and more effective final rule,” SEC Chairman Mary Jo White said in a statement. “These comments addressed unintended consequences and offered alternatives for consideration, and these views were taken into account.” 
 
 The final version got a positive review from lawmakers who championed it. Senators Carl Levin, a Michigan Democrat, and Jeff Merkley, a Democrat from Oregon, said the final rule “looks improved” from the 2011 proposal. 
 
 “We are still reviewing the details of the final rule, but early indications suggest that persistence and common sense can prevail in the face of even the fiercest special interest lobbying campaigns: Hedging looks tougher, market-making looks simpler, trader compensation remains appropriately structured, and CEOs are required to set the tone at the top,” the senators said in a joint statement. 
 
 Here are summaries of the rule’s major provisions: 
 
 Making Markets 
 
 The Volcker rule bans banks from trading to profit for their own accounts while allowing them to continue making markets for clients. Distinguishing between those two practices has been one of the most difficult tasks for regulators. 
 
 In the final rule, regulators eased the criteria banks must meet to qualify for the market-making exemption. To receive the exemption, a trading desk must both buy and sell contracts or enter into both long and short positions of those instruments for its own account. 
 
 The trades must not exceed, on an ongoing basis, the “reasonably expected near-term demands of clients.” The rule instructs banks to determine that demand based on historical data and other market factors. Further, the rule requires that compensation arrangements not be designed to reward prohibited trading. 
 
 Industry lobbyists had pressed for the exemption to be widened, saying banks need to build up inventories of stocks, bonds and other products to help clients when they eventually place orders. Banks were joined by asset managers such as Vanguard Group Inc. and AllianceBernstein Holding LP in warning that a narrow exemption could unsettle markets. 
 
 Portfolio Hedging 
 
 Regulators will require banks to demonstrate on an ongoing basis that their trades hedge specific risks in order to win an exemption from the Volcker rule ban. 
 
 The banks must analyze and independently test that a hedge “demonstrably reduces or otherwise significantly mitigates one or more specific, identifiable risks,” the rule said. Banks must provide “ongoing recalibration of the hedging activity by the banking entity” to ensure it is allowed. 
 
 The hedging provision became central to the Volcker rule debate after JPMorgan lost $6.2 billion last year in bets on credit derivatives known as the London Whale. The trades, conducted in the U.K. by the bank’s chief investment office and nicknamed for their market impact, were described by JPMorgan executives as a portfolio hedge. 
 
 Three months after the losses were disclosed in 2012, JPMorgan Chairman and Chief Executive Officer Jamie Dimon, 57, told lawmakers that the Volcker ban “may very well have stopped parts of what this portfolio morphed into.” 
 
 Bart Chilton, a Democratic CFTC commissioner who earlier said he planned to vote against the rule because it was too weak, said it had been strengthened enough to win his support. 
 
 “The language has been solidified tightly to avoid loopholes,” Chilton said in a statement. “When people say this version of the Volcker rule will stop circumstances like the London Whale, this ongoing recalibration provision is exactly what will help avoid similar debacles.” 
 
 Sovereign Debt 
 
 The buying and selling of securities backed by a foreign sovereign will not fall under the proprietary trading ban in most circumstances. That exemption includes securities issued by foreign central banks and applies to U.S. banks with overseas operations as well as foreign firms with affiliates in the U.S. 
 
 The initial Volcker rule draft drew international criticism for its reach into banks based overseas as well as for its impact on foreign sovereign debt markets. 
 
 Michel Barnier, the European Union’s financial services chief, complained about the rule’s “extraterritorial consequences.” Canadian and Mexican bankers and government officials said the proprietary trading ban would violate the North American Free Trade Agreement’s guarantee that banks be allowed to deal equally in U.S. and Canadian debt obligations. 
 
 Regulators also allowed more flexibility for overseas banks. They will be exempt from the ban for trades accounted for outside the U.S. so long as their employees deciding to buy and sell contracts are also located outside the country. The final rule also frees overseas banks from the ban for trades they conduct on U.S.-based exchanges and clearinghouses, and for trades they have with foreign operations of U.S. banks. 
 
 Fund Investments 
 
 The proprietary trading rule seeks to limit banks’ speculative bets in another way: by curbing their investments in private equity, hedge funds and commodity pools. 
 
 U.S. banks have already begun cutting their stakes in such funds, and will need to reduce them further to meet the law’s limit of 3 percent of Tier 1 capital invested in the funds. For example, Goldman Sachs cut its investment in such funds to $14.9 billion as of Sept. 30, down from $15.4 billion when Dodd-Frank was passed. 
 
 Regulators granted broader exemptions for some types of funds. Under the final rule, joint ventures, issuers of asset-backed securities and wholly-owned subsidiaries are among exempt funds. 
 
 CEO Responsibility 
 
 Apart from the specific limits on bank investments and trading practices, the Volcker rule includes efforts to change the culture of trading on Wall Street. 
 
 Toward that end, the rule tells banks’ boards and top managers that they “are responsible for setting and communicating an appropriate culture of compliance.” 
 
 The centerpiece of the governance changes is a requirement that CEOs “annually attest in writing” that the company has “procedures to establish, maintain, enforce, review, test and modify” the compliance program. 
 
 The wording will be a relief to Wall Street chiefs who were concerned they would have to personally guarantee that their firms were in compliance with the rule, according to people familiar with the banks’ thinking. Executives already file a similar certification with the Financial Industry Regulatory Authority, a self-regulatory group for brokerage firms. 
 
 Supervisory Focus 
 
 In the end, after hundreds of pages outlining numerous what-if’s, exemptions and special circumstances, the rule reiterates that banks will now have to prove to supervisors that they are adhering to the overriding principle that Volcker and Obama put forward in 2010 as a way to prevent another financial meltdown. 
 
 According to documents released by the Fed, the rule prohibits “any transaction or activity” exposing banks to high-risk assets or strategies “that would substantially increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States.” 
 
 To contact the reporters on this story: Silla Brush in Washington at sbrush@bloomberg.net; Cheyenne Hopkins in Washington at chopkins19@bloomberg.net; Jesse Hamilton in Washington at jhamilton33@bloomberg.net 
 
 To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net
– European leaders today lauded President Obama's plan to limit the size and risk-taking of the nation's banks, but stock markets worldwide were rattled. Asian markets fell sharply today and European markets opened down, following a 213 point drop in the Dow yesterday, its biggest 2-day loss since March. Europeans said they'll seek an international agreement to avoid competing bank policies that, aiming to shore up stability, would put one country at a disadvantage. Bankers fear the proposal, which would prevent commercial banks from running hedge funds and private equity firms, and separate commercial and investment banking within the big firms, will mean an end to huge profits in the financial sector, the Times of London reports. "It's like a child who is being told not to do something," the editor-in-chief of the Stock Trader's Almanac tells BusinessWeek. "'Don't take my toy away'—that's a natural reaction."