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U.S. Securities and Exchange Commission

SEC Issues Concept Release Seeking Comment on Structure of Equity Markets


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Washington, D.C., Jan. 13, 2010 — The Securities and Exchange Commission today moved forward with a broad review of the equity market structure, voting unanimously to issue a concept release seeking public comment on such issues as high frequency trading, co-locating trading terminals, and markets that do not publicly display price quotations.

The U.S. equity markets have undergone significant change in recent years from a market structure that relies on people shouting on the exchange floors to one that relies on advanced computer technology. The speed of trading has accelerated from seconds to milliseconds to microseconds. Trading volume has expanded, and new trading centers have entered the markets and captured a significant share of volume. Liquidity is now dispersed among many different venues, and these venues offer a complex array of order types and other trading services.

In conducting this review, the Commission seeks to ensure that the current market structure serves the interests of long-term investors who are willing to accept the risk of equity ownership over time and are essential for capital formation. These investors include individuals who invest directly in equities, as well as retirement plans and other institutional investors that invest on behalf of many individuals.

"At the Commission, we must continually assess how changes in the market are affecting investors," said SEC Chairman Mary L. Schapiro. "We must try to understand how these changes may impact the markets in the future, so we can steer clear of any unnecessary risks to investors."

The Commission is assessing how all types of individual investors and all sizes of institutional investors — small, medium, and large — are faring in the current market structure. It also is assessing whether the current market structure promotes capital formation in companies with varying levels of market capitalization.

The concept release requests comment on all matters related to market structure. In addition, it asks many specific questions about the current market structure, including:

Market Quality Metrics

  • What are the best metrics for assessing market quality for long-term investors and have these metrics improved or worsened in recent years?

Fairness of Market Structure

  • Is the current highly automated, high-speed market structure fundamentally fair for investors?

High Frequency Trading

  • What types of strategies are used by the proprietary trading firms loosely referred to as high frequency traders, and are these strategies beneficial or harmful for other investors?
  • Is the overall use of any harmful strategies by proprietary firms sufficiently widespread that the Commission should consider a regulatory initiative in this area?


  • Do co-location services (which enable exchange customers to potentially route trades faster by placing their computer servers in close proximity to an exchange's computer system) give proprietary trading firms an unfair advantage?
  • If so, should the proprietary firms that use these services be subject to any specific trading obligations?

Dark Liquidity

  • Has the trading volume of undisplayed trading centers (such as dark pools) reached a sufficiently significant level that it has detracted from the quality of public price discovery?
  • If more individual investor orders were routed to public markets, would it promote quote competition in the public markets, lead to narrower spreads, and ultimately improve order execution quality for individual investors beyond current levels?
  • Are a significant number of individual investor orders executed in dark pools and, if so, what is the execution quality for these orders?

The Commission's ongoing review already has led to several rulemaking proposals that are narrowly targeted to address discrete issues and intended primarily to preserve the integrity of longstanding market structure principles.

One proposal would ban flash orders, which enable a person who has not publicly displayed a quote to see orders less than a second before the public is given an opportunity to trade with those orders.

Another proposal would strengthen transparency requirements for non-public trading interest, including dark pools of liquidity which are a type of alternative trading system that does not display quotations to the public.

In addition, the Commission today proposed for public comment a new market structure initiative to strengthen the risk management controls of broker-dealers that provide market access.

The Commission intends to use the public's comments on the concept release to help determine whether additional regulatory measures are needed to improve the current equity market structure. Public comments on the concept release must be received by the Commission within 90 days after its publication in the Federal Register.

The full text of the concept release is available on the SEC's Web site.

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Modified: 01/14/2010