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SEC 'has' to investigate Christmas Eve sell-off, says ex-SEC attorney

Key Points
  • Wild market swings are a clear indication there is a market structure issue, says former SEC attorney Teresa Goody.
  • Dec. 24, 2018, was the worst Christmas Eve trading day ever for U.S. equities.
  • "The SEC has to investigate … [and] look into why there's this volatility, because it's not fair to everyday investors," says Goody.
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Should regulators step in after the stock market's wild swings?

The market sell-off on Christmas Eve shouldn't be ignored by regulators, a former attorney for the Securities and Exchange Commission told CNBC on Thursday.

Dec. 24, 2018, was the worst Christmas Eve trading day ever for U.S. equities, with the Dow Jones Industrial Average plunging 653 points.

Teresa Goody, who worked as a lawyer in the Office of General Counsel at the SEC, said what happened on Christmas Eve was different from 2010's "Flash Crash" that saw the Dow plunge 1,000 points before it pared those losses. However, she said regulators can investigate based on issues in the market's structure.

"When you have these wide swings in the market — 400, 500, 600 points, 2 to 3 percent — I think that's a clear indication that that's some sort of a market structure issue," Goody said on "Power Lunch. "

"The SEC has to investigate … [and] look into why there's this volatility, because it's not fair to everyday investors. It's not fair to all investors, really. It goes to the fair and efficient markets that we have."

Xinhua News Agency | Xinhua News Agency | Getty Images

She's specifically pointing the finger at high-frequency trading, an automated trading platform that can place a large number of orders at lightning speed.

Goody's comments echo those of CNBC's Jim Cramer, who argued Wednesday that the rapid sell-off should have been probed by Wall Street regulators.

"When stocks went into free-fall on thin volume the day before Christmas, that should have prompted officials at the exchanges, maybe [the] Treasury [Department], [the] SEC, to ask what the heck happened," he said on "Mad Money."

The SEC did not immediately respond to a request for comment.

Goody believes the volatility is eroding investor trust in the stock market.

"Once there is massive sell-off, you have the ability for people who are in the market, like high-frequency traders, to get out early and then once the market starts coming around to come up, buy in low," she said. However, everyday investors lose more money because they can't act as quickly, she added.

And that's exactly what happened on Dec. 24, said Goody.

"The automated algorithms ... start a massive sell-off and then investors hear that and start selling and then the stop-loss orders kick in," she said. "It's all of this automated technology that we really haven't kept up with."

— CNBC's Elizabeth Gurdus contributed to this report.

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