Thank you, for inviting me to join you today. 

You are an impressive group.  Tom Gira tells me there are 530 of you, and that as many as 450 of you are here with us now. 

I’m also glad that eighty of your peers aren’t here at the moment.  We need to have someone left at the controls making sure our markets are safe while we talk about making them even better. 

Today, I want to leave you with three points.  First, your work is incredibly important to our capital markets.  Second, the partnership between FINRA and the Commission is incredible strong, and must remain strong to address future challenges.  And third, I think we can improve our partnership by making some minor tweaks to our existing rules and our approaches to enforcement.

Next week, the Commission will celebrate its 80^th birthday.[1]  The Commission’s partnership with self-regulatory organizations dates back to the 1930s.  Since then, the National Association of Securities Dealers, and now FINRA has continued to supervise the ever expanding, and increasingly complex securities marketplace. 

So, before I get too far into my remarks, I want to thank you.  Our partnership is stronger than ever and that is a tribute to your passionate and dedicated protection of millions of American families and businesses who rely on the markets every day.  

Together we have a challenging mission – to ensure that trust remains in our markets.  Without trust, investors will look elsewhere, and our businesses won’t get the capital they need to survive and create jobs. 

Your job is not an easy one.  Like the Commission, you oversee both equities markets and fixed income markets.  The brokers you oversee trade instruments all over the world at lightning speeds.

You have a lot to keep your eyes on.  To remain on top of it all, you must constantly invest in new infrastructure—both people and machines—to monitor an increasingly large number of securities traded each day.  And you must stay one step ahead of the thousands of brokers you monitor in terms of ideas, schemes and business models. 

The American investor deserves no less.  And you deliver each and every day. 

Your work has become even more challenging recently as market integrity has risen to the forefront of the news cycle and is on the minds of average investors.   A single question has come to dominate the discussion.  And that question has been asked countless times in a variety of ways and in a variety of places.  It’s been asked by reporters, members of Congress, sophisticated traders, pension fund managers, and ordinary Americans.  It’s a question that’s been asked by state regulators, the Commission, and by you:   “Are the markets rigged?”

That simple question carries with it a lot of baggage.  If investors believe the markets may be rigged, then they may withdraw their capital, leaving businesses without their lifeblood.  And the question has become increasingly important, and difficult to answer, because of a lack of understanding and transparency.  

As machines have risen to replace humans in our markets, they have provided tremendous benefits, but when things go wrong or are hidden from view, there can be significant consequences.  Some have concluded that the markets are stacked against them.  And others have worried that the market is so perilous that one rogue computer can bring about a systemic collapse.

On May 6, 2010, many of us learned how interconnected and dependent our computerized marketplace could be.  On a day already filled with fears of a European debt crisis, one relatively small, simple event triggered a cascade of steep price declines in interrelated products, traded at multiple venues, overseen by multiple regulators.[2] While the recovery was relatively quick, the fear of a broad market collapse has lingered. 

Congress held hearings on the issue.  And each year, the Financial Stability Oversight Council, which was created by the Dodd-Frank Act to identify and address systemic risks, dedicates a portion of its annual report to market infrastructure and continuity concerns.[3]

The markets, however we define them, are incredibly complex.  And they serve an incredibly important public function.  We, as regulators, must zealously protect them. 

But if the markets are not rigged, then how can we explain what we see every day?   Computerized traders make decisions and places orders in fractions of a second, communicating at near-light speeds through fiber optic cables, microwaves, and laser beams. 

How can any ordinary investor keep up? How can a pension fund manager know that orders aren’t being front-run by another trader with better information and faster computers? 

Our markets are not unlike our highway system.  And the public purposes for each are equally important.  Highways move people and markets move assets, from one place to another.  They are big.  They are complex.  They are interconnected.  And they are built on infrastructures that were first set up decades ago.  They are constantly expanding and evolving.  And they are in constant need of maintenance and repair. 

If you’ve lived in the DC area for more than a decade or so, you’ve seen two-lane roads become four lane highways.  You’ve seen intersections become so clogged with traffic that they’ve become unsafe for pedestrians and nearly impossible for vehicles to navigate.  You’ve also seen the additions of HOV lanes and sound barriers.  And you’ve also seen potholes the size of small cars and water main breaks that can cripple traffic for hours. 

And there are those who cheat.  Some people speed, go the wrong way down one way streets, or abuse the HOV lanes.  I have heard that some people place inflated dolls in their front seats to look as though they have a second passenger so they can travel in the HOV lanes. 

And we have accidents.  We have fender benders and pileups.  Some are caused by humans, and others by faulty equipment.

These are significant problems.  But our highway system is not so broken that it fails to perform its basic function.  It still allows for the movement of people and things. 

But it could be more efficient.  It could be more reliable.  It could be safer.  Each year, we invest billions of dollars in an effort to make our roads more reliable, faster, and safer.  Of course, we spend money on asphalt and bridges, but we also spend the money on speed limit signs and state troopers. 

We must not only have strong physical infrastructures, but also smart rules for the road, and enforcement of those rules. 

Our markets are not all that different. 

You work every day to make our markets more reliable, faster and safer.  And we at the Commission do as well.

A few weeks ago, I visited your office in Rockville and I got to see, first hand, some of the incredible work you’re doing every day.  You now oversee the vast majority of listed equities trading in this country.  You have programmers designing patterns to sniff out bad behavior.  Your trading surveillance is the first line of defense of our markets.  What patterns do you see?  What problems do you see? 

You oversee fixed income trading every day.  What do you see there?

You conduct examinations.  What are brokers doing?  Why are they doing it?  What are the problems you see for the entities themselves?  Keep sharing your thoughts with us at the Commission.

One of the challenges we at the Commission face with our enforcement efforts is that most violations require proof of intent.  If a trader is knowingly conducting a strategy to manipulate or lure another trader into an order, then you might have phone recordings or emails to prove it. 

But what if the trader is a machine?  Where’s the proof?  Can you demonstrate intent by simply showing that the manipulative activity occurred over and over again?  Is ten times enough?  A hundred?  A thousand? 

I know you struggle with this challenge every day.  I want to help make your job easier.  We should be re-examining our existing rules to make sure that we haven’t made it simply too difficult to prosecute bad conduct. 

One way to do that might be to write or revise our rules to get at misconduct, regardless of intent.  For example, Rule 105 of Regulation M prohibits firms from shorting securities in advance of buying securities in an offering.  In some cases, if intent can be shown, this same misconduct may be viewed as insider trading.  But, in many cases, bad intentions may be difficult to prove.  In these circumstances, the Commission has made the decision to just prohibit the practice.

In recent months, the Commission has brought a number of these cases, and I think we could apply the lessons of that success to some of our more difficult to enforce rules.  We should explore areas where we may want to focus on the bad conduct, regardless of intent. 

Firms need to be able to identify problems and stop themselves from sending garbage into our markets.  One new rule, the Market Access Rule, is already helping.  I believe that this rule will help firms focus on their obligations to the markets, and will result in dramatic improvements to systems and controls. 

Another issue we should be thinking about is requiring firms to take greater responsibility for their people.  The brokers who make trading decisions must be registered with Commission. 

But, what if the decision is being made by a computer?  Shouldn’t the computer programmer who’s writing the code be responsible for knowing the rules and not breaking them, the same as a human trader? 

Brokers aren’t the only market participants who need to invest in testing, monitoring, and continuous refinement and improvement.  The same is true with exchanges. 

They need to spend money to build systems that keep up with their business needs and regulatory obligations.  And, if an exchange fails to make investments in technology, then it should face the consequences for its failures.  SRO-based immunity does not protect against problems that arise from for-profit exchange activity.

We, as regulators, also need to make sure our systems are able keep up.  The Commission’s development of MIDAS is a great first step, but that is a far cry from what we need. 

We need the Consolidated Audit Trail.  The CAT will provide the critical information we need to know about who’s trading in our markets.  And it will help us understand how our markets work in complex ways. 

But we also need to learn from the SIP.  The SIP has long been plagued by underinvestment.  There are a lot of reasons for that, but the most basic one seems to be that the incentives are wrong.  If the SIP is slow and error-prone, then the proprietary feeds are relatively more valuable.  That is not the right incentive. 

As a result, it’s likely only a matter of time until the SIP fails.  Although the industry is trying to fix the SIP, without fundamentally shifting the incentives, I fear we’re not likely to make much long-term headway.  We have to be careful that we don’t simply re-create the same backward incentives with the CAT. 

I look forward to exploring how the CAT should be governed and, most importantly, how the incentives can be aligned to ensure its usefulness in the years ahead.

Another issue that consistently arises as we talk about fairness is how brokers route orders.  What role can FINRA play in ensuring that investors are not harmed by brokers’ order routing practices?  What role can the Commission play? 

I think we need to empower market participants to better protect themselves.  Investors deserve to know what happens to their orders, and what that means for their executions. 

And we should make sure that investors have the tools, the training, and useful metrics to make informed decisions.  We should update best execution standards and improve best practices.  And we should revise reported metrics to make analysis more useful. 

The buy side needs to know what the sell side is doing, and why.  This will promote not only transparency, but also greater trust. 

Lastly, I want to speak with you about enforcement.  Your enforcement process is crucial to your ability to enforce your rules and protect the markets.  And your general principles are in the right direction.  Your sanctions should be designed to deter misconduct and improve business standards.[4]  And recidivists should be treated more harshly. 

But, I fear the results, after months or years of hard work by you, are too often financially insignificant for the wrongdoers.  Your enforcement cases must be impactful, and provide strong motivation for compliance. 

I would encourage you to examine your sanctions and update them.  I think the Commission could be very helpful to you in that process.

I’ve covered a lot of material today.  I hope I’ve shared with you how critical you are to our markets, and to the effective operation of the Commission.  But I also hope I’ve shared my belief that we can do better. 

We should not run from our challenges, or pretend that problems don’t occur.  If the United States is to remain the top financial center of the world, we must relentlessly strive to keep our markets the most stable, the most efficient, and the most fair. 

You are critical to this mission.  Keep at it.  Thank you for inviting me here today and for doing what you do every day.