Speech by SEC Chairman:
Opening Statement at SEC Market Structure Roundtable
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
June 2, 2010
Good morning. Welcome to the Securities and Exchange Commission's Market Structure Roundtable. We are grateful that so many respected and experienced professionals have agreed to participate as panelists in today's meeting. And we are looking forward to an instructive day, listening to these experts' comments, insights and recommendations on critical market structure issues — particularly in the areas of high-frequency trading, undisplayed liquidity, and the appropriate metrics for evaluating market structure performance.
We announced this roundtable two months ago, as part of our effort to build a comprehensive response to the extraordinary changes in the structure of our equity markets in recent years. That effort began back in January, with a Market Structure Concept Release which generated valuable commentary that is helping shape today's discussion.
Our roundtable is also informed by a more recent event: the severe, albeit brief, market disruption of May 6. For 20 minutes that afternoon, U.S. financial markets failed to execute their essential price discovery function, experiencing a decline and recovery that was unprecedented in its speed and scope. That period of fluctuating prices both directly harmed investors who traded based on flawed price discovery signals and undermined investors' faith in the integrity and fairness of the markets.
We are making progress in our ongoing review of May 6, and we have begun putting in place safeguards that we expect will help reduce the likelihood of this type of unusual trading activity from recurring, publishing for comment exchange rules which would establish a five-minute trading pause for certain individual stocks if their prices decline by 10 percent over a five minute period. But to be clear, this is very much a "first step" in what I expect to be the Commission's response to flaws exposed by the May 6 aberrant trading.
Even prior to May 6, however, the Commission had already launched initiatives to strengthen the U.S. securities markets and to protect investors. We proposed rules that would prohibit flash orders, increase the transparency of dark pools of liquidity, prohibit broker-dealers from providing unfiltered access to exchanges, and create a large trader-reporting system.
Just last week, we published for comment a proposal for development of a consolidated audit trail. And, as I noted a moment ago, the Commission issued a concept release on market structure in January, soliciting public comments on the impact of different trading venues, strategies and tools — including high-frequency trading — on our markets and investors. These issues are especially timely in light of the May 6 events and will be the center of today's market structure roundtable.
The concept release raised questions across three broad categories:
First, it asked about the performance of the market structure in recent years, particularly from the standpoint of long-term investors;
Second, it sought comments on the strategies and tools used by high frequency traders, such as co-location services; and
Third, it asked about dark liquidity in all of its forms, including dark pools, ATSs, OTC market makers, and undisplayed order types on exchanges and ECNs.
Since this release, we have received over 170 comment letters. We hope to explore many of the important questions and ideas raised in those letters, today.
During the course of the day, we will hear from three different panels. Each will begin with the panelists taking a few moments to share their thoughts on the topic being discussed. And then the floor will be open to questions from the moderators and Commissioners.
The first panel will provide a partial overview of the current market structure performance and focus on price volatility, as panelists discuss:
How well the current structure establishes prices and allows investors to efficiently buy and sell stocks, both in normal and in stressed trading conditions.
What sort of cross-venue pausing mechanisms do our markets need and how would these mechanisms better serve investors.
What the most useful metrics for assessing market structure performance would be.
In addition, the panel will discuss regulatory measures that the Commission might take to improve current market structure and appropriately minimize short-term volatility and resulting harm to long-term investors.
The second panel will explore the growth of high-frequency trading and its effects on the market, including:
- The effects on liquidity and spreads, both in normal and stressed trading conditions.
- Market-impact costs for other market participants.
- Strategies and tools that are beneficial or harmful to the markets or certain participants.
The panel will also ask whether high-frequency strategies provide liquidity to the market in a manner comparable to the traditional obligations of market makers, whether high-frequency traders enjoy an unfair advantage in the markets and whether high frequency traders should be subject to any trading obligations comparable to those of traditional market makers.
The third panel will discuss issues surrounding undisplayed liquidity, including:
- What liquidity is and what role it plays in today's market structure.
- Access to and limitations on access to different types of dark pools.
- The market participants that they serve.
In addition, we are interested in hearing what portion of institutional and retail investor order flow is executed in the undisplayed markets and whether institutional and retail investors receive better quality executions in dark markets. The panel will also explore whether the volume of trading in the undisplayed venues has become sufficiently large that it is detracting from the quality of price discovery in the public markets — and if so, what regulatory responses might be appropriate.
There is a hugely important national conversation taking place about our markets — who they serve and how they accomplish their critical capital formation and price discovery functions. I hope that today's presentations will help inform us in taking the right steps to ensure the integrity of markets that are critical to our economic success. Our panelists today are leaders in their respective fields and represent a range of constituencies including: retail and institutional investors, issuers, exchanges, alternative trading systems, financial services firms, high frequency traders, and the academic community. We are privileged to have them here, and grateful for the effort they have made to take part. We look forward to a spirited and substantive discussion.