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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Assuring Securities Markets that are Fair, Transparent and Efficient


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Open Meeting
Washington, D.C.
January 13, 2010

Good morning. I join my colleagues in thanking the staff for its work on the releases before us and in welcoming Robert Cook to his first Open Meeting as the new Director of the Division of Trading and Markets. As Robert already knows, he's arrived at one of the busiest times in the history of the SEC and of the Division. It is clear that we will be working with each other quite a bit, and I am looking forward to the important tasks ahead.

Today, we take two significant steps. First, we propose a rule to address a worrisome practice—commonly known as "sponsored access"—that has arisen within the securities markets. Second, we begin a comprehensive review of the equity market structure. I support both of these initiatives, and, because they are related, I will address both in a single set of remarks.

The extreme speed at which orders interact in today's market structure has led to trading systems engineered for the least possible delay. When milliseconds matter, we must ensure that the "quest for speed" does not create risks to the system. The staff has already identified several instances in which inadequate controls have led to serious trading errors. And a recent report indicates that unfiltered access has grown to account for about 38% of stock market trading volume.

In light of this, it is important to reduce the temptation to sacrifice sound compliance and risk management practices for the sake of speed. To that end, the Commission is proposing to require broker-dealers with market access to have controls and supervisory procedures reasonably designed to manage the associated trading risks and to ensure regulatory compliance. This is an appropriate step to take today, while we also undertake a broader study of market structure.

That brings me to the second of today's releases. Thirty-five years ago, Congress charged this agency with facilitating the establishment of a national market system. Since then, the markets have evolved dramatically and the pace of change has accelerated rapidly in recent years. Just fifteen years ago, securities transactions were routinely negotiated by individuals over the telephone. Today, trading algorithms generate orders so quickly that trading strategies are affected by the time it takes for light to move through fiber optic cable.

Many of the recent changes in the markets have resulted from exponential growth in computing and communications technology. In addition, the Commission's own regulatory and enforcement actions have shaped the evolution of the markets. Chief among these are the 1996 enforcement action involving anti-competitive conduct by market-makers, the 1997 Order Handling Rules, the adoption of Reg ATS in 1998, decimalization in 2001, and the adoption of Reg NMS in 2005. Moreover, the equity markets have also become increasingly interrelated with the markets for futures and derivative instruments.

In light of recent developments and turmoil, it is an appropriate time for the Commission to evaluate the current state of the markets. As we begin, it is also appropriate to reiterate the principles that should govern our evaluation: fairness, transparency, and efficiency. In particular, we must focus on how the current market structure serves long-term investors and companies that need to raise capital. The markets are not ends unto themselves. Rather, they are the means for investors to save for the future, and to allocate those savings efficiently among companies that put that capital to work in our economy. And a market structure that does not properly serve American investors and the broader economy is simply not doing its job. Generating wealth for intermediaries should not come at the expense of fairness and integrity.

The concept release we consider today asks two fundamental questions. First, how well is the current market structure performing the job it is meant to do? And second, how can we improve the market structure? Our goal is to learn all that we can through the answers we will receive. As a Commissioner, I can attest that public participation improves the Commission's process immeasurably. My own understanding has benefited greatly from many thoughtful and informative comment letters.

With respect to both of today's releases, I urge all interested parties to share your views with us—individual investors and advisers, large financial intermediaries, institutional investors, and public companies, both small and large. And I especially want to encourage commenters to submit relevant empirical data describing how the current equity market structure operates, including both its benefits and its costs. The better informed we are, and the more comprehensive our understanding, the better regulators we can be.

As the Commission proceeds, we need to be thoughtful and deliberative and we need to ensure that we preserve the fairness, transparency, and efficiency that have made our capital markets the largest and most effective in the world. We should observe the adage: "do no harm." Yet, it will be just as important that we not be timid and that we do what needs to be done.

In closing, I again want to thank the staff and to offer my support for both of these releases. The process we begin today will help us ensure that our equity markets merit the trust of investors. It's a step we take not a moment too soon.


Modified: 01/13/2010