Market Structure in the 21st Century: Bringing Light to the Dark

Commissioner Kara M. Stein

Remarks before the Securities Traders Association’s 82nd Annual Market Structure Conference

Thank you, Jim [Toes], for that kind introduction.  I appreciate the invitation to be with you today.  Both the Securities Traders Association (“STA”) and the U.S. Securities and Exchange Commission (“Commission” or “SEC”) were formed in 1934, at a pivotal time in our nation’s history. Both have been serving investors now for over 80 years.  It is a pleasure to be speaking to a group of professionals who have been, and continue to be, concerned about the structure and operations of our capital markets. 

Before I continue with my remarks, let me remind you that the views I express today are my own, and do not necessarily reflect the views of the SEC, my fellow Commissioners, or members of the staff.

Market structure means many things to many people – whether it is the unseen plumbing of our securities markets or the big picture focus on how and why securities trade.   Today’s market structure would be nearly unrecognizable to a securities trader working in 1934, a world dominated by shouts, gestures, and the floor.  The Securities Act Amendments of 1975 provided a significant regulatory push to create a national market system (NMS) where computers, new telecommunications tools, and the advent of information systems began to have a deep and lasting impact on the securities markets.[1]  The goals were clear:  improve the transparency of market quality information; improve the speed and efficiency of the market; promote fair trading; and ensure that orders get the best price.  The last three decades have seen a lot of progress on those fronts.   The securities trading infrastructure was rebuilt.   Quietly and without fanfare, it became better…stronger…and faster.  And yet, as we now know, it has also become a lot darker and more opaque.

There is little doubt that our securities markets are better in many ways.  Competition, innovation, and growth are their hallmarks.  Thanks to redundancies inherent in the proliferation of trading venues, markets are stronger and, in certain respects, more resilient.  With trades executed in less than half a millionth of a second, the markets are undoubtedly faster, providing a level of service that many could not have imagined twenty or thirty years ago.  

Conversely, today’s markets are also complicated, interconnected, and fragmented.  Too often the hidden parts of the market eclipse the lit parts.  And, how complex products and strategies operate within the market is often not well understood by investors, by the public, and by regulators.     

This is in large part a function of the incredible technological changes that have transformed securities trading.  Practices and regulations that had been well-defined in the “human era” of our markets now seem obsolete, as humans have been replaced with machine-to-machine interactions.  The current environment sometimes feels closer to a massive computer game than a system dedicated to allocating capital efficiently and serving investors.

Against this backdrop, I find the title of your conference,  “Back to the Future: Trading and Regulation 2015,” an apt way to frame a discussion of market structure.  Occasionally, many of us have wished that we had a DeLorean – the famous car from the movie – to take us back in time, back to the floor, back to the shouts and gestures.  In effect, back to a simpler time where roles and responsibilities were better understood.  But, for better or for worse, that is not an option.  The markets have evolved, and all of us must keep evolving as well.

In a number of speeches, I have discussed the challenges that disruption poses to our modern capital markets, as well as its potential for innovation.[2]  Today, I will bring us back – back to the future, so to speak – to the need for transparency.  For more than 80 years, transparency has been one of the most important tools the Commission has deployed to keep our capital markets thriving.  Transparency is about giving investors the information they need to make informed decisions that promote confidence in the markets.

Transparency is not just about disclosure.  It’s also about verification.  I know that you understand that our entire system is built on trust, confidence, and integrity.  In fact, it is STA’s motto – dictum meum pactum – or “my word is my bond.”  Traders do business with other traders only when they can count on their word – on their integrity.  

Today, I will focus first on why transparency is needed in Alternative Trading Systems (“ATS”), or dark pools.  Second, I will discuss the consolidated audit trail (“CAT”) as a critically important element of our transparency agenda.  Finally, I will explore the question of whether, in this new digital age, we have sufficient transparency regarding the roles and responsibilities of key market players.  In each of these areas, I hope you can keep in mind my central theme that transparency is critical to integrity and confidence in the markets.

Alternative Trading Systems

With the speed and complexity now inherent in securities transactions, information asymmetries are more likely to arise.   Although transparency can’t solve every problem, it goes a long way towards leveling the playing field and empowering investors.  It is clear that opacity does the opposite, and actually favors the interests of certain market participants over others.     

Of course, dark liquidity has played a role in our securities markets since the earliest days.  Dark pool trading, as you know, is not a recent phenomenon.  It has been around for decades.  The overarching rationale for dark pools was to enable trading of large blocks of securities by institutional investors in a way that helps them obtain the best possible price.

The challenge is that the dark marketplace is becoming larger and larger.  And it is unclear whether dark pools continue to perform the functions that were originally intended.  In fact, studies have shown that average execution size at dark pools in the U.S. has decreased to less than 200 shares.[3]  Recent estimates show that nearly twenty percent of securities trading now occurs on dark venues, which are mostly alternative trading systems or ATSs.[4]  These private trading platforms attract order flow ostensibly because large investors are concerned about information leakage and the impact on price from placing their orders.  Yet, as more and more trading is routed to dark venues that have restricted access and limited reporting, I am concerned about the repercussions.  Overall market price discovery may be distorted rather than enhanced.  Conflicts of interest may not be readily apparent.   

Moreover, recent enforcement cases demonstrate serious problems in the functioning of a number of ATSs.  In one recent case, the ATS operated a secret proprietary trading desk and exploited confidential information from subscribers.[5]  In another case, an ATS used order types that prioritized certain subscribers over others.[6]  And just today, the Commission announced a matter that involved a broker-dealer dumping a large volume of order types into the market, violating trade-through protections.[7]

Are these isolated incidents or symptoms of systemic problems and inherent conflicts of interest within dark markets?  It’s nearly impossible for ordinary investors, and frankly most sophisticated investors, to know.  ATS system operations are basically secret and cloaked in darkness.  And ATSs vary widely in how they approach pricing, order priority, and customers.  Against this backdrop, how are investors supposed to evaluate risks and make informed choices?  This is why additional transparency is so important to this space.

The Commission’s 2009 proposals were a good start.  I renew my call on the Commission to adopt dramatic reforms to bring transparency to dark venues.  No longer should the ways an ATS operates be hidden from the public and disclosed only to a select few who profit by it.  Instead, all market participants should be able to view and understand their operations.  When ATSs compete, it should be on a level-playing field where investors and other market participants can choose what is the best trading venue for them. 

Further, more execution and order data needs to be available for public consumption.  As dark pools gain market share, market participants should be able to see quotes and order flow, even if it is not provided contemporaneously.  Again, transparency is key.

Over the course of my time at the Commission, I also have viewed the modernization of our disclosure rules for order execution and routing information to be important priorities that could be done fairly quickly.  Unfortunately, they have not moved forward. I hope that you will share with me your best thoughts on how to get these done sooner rather than later.

The Consolidated Audit Trail

As many of you know, for two years I have been a champion of the consolidated audit trail, or CAT.  For those of you who are not familiar with it, it would create a system that would enable us to comprehensively track every order and trade made in the market, across venues and systems.[8]

I have been trumpeting the CAT not simply because we have a final Commission rule mandating its construction, but more importantly because I see its potential to promote confidence in the integrity of the market.  By enhancing the SEC’s oversight capabilities, it adds significantly to the transparency of the marketplace.  I’ve spoken about the CAT before, but I want to return to the topic once again to emphasize its importance to the broader work the Commission needs to be undertaking to add light to our markets.

In February 2010, then SEC-Chair Mary Schapiro announced the Commission’s initiative to create a consolidated audit trail tracking activity in NMS securities.[9]  Just a few months later, the “Flash Crash” of May 6, 2010 demonstrated the overwhelming need for a robust and comprehensive audit trail providing a consolidated view across all of our trading venues.  The events that occurred on August 24th, along with others in between, reinforce the need for just such an audit trail.

More importantly, as speed and complexity have become almost insurmountable forces in our marketplace, effective oversight simply cannot happen without the CAT.  That’s why the Commission adopted a final rule mandating that FINRA and the exchanges build it.[10]  But as I stand before you today, we have no consolidated audit trail.  Construction of the CAT has not yet begun.  Counting internal deliberations, nearly six years have been spent choosing someone to build the CAT.[11]

In any major corporation, a project of this magnitude would have a dedicated team – probably reporting to the CEO – with the mandate to get the job done.  Unfortunately, the SEC has largely outsourced its responsibility.  This has not worked. 

Two years ago, I asked to have a new role of CAT project manager created at the Commission.  This person would have the authority, responsibility, and accountability, both within our building and outside it, to get the job done.  And I have consistently advocated for more resources and attention to be paid to developing the CAT.[12]  Sadly, I have seen almost no progress.   

Let me tell you what can be achieved in six years.  On April 29, 2009, construction began on the most modern and sophisticated attack submarine in the U.S. Naval fleet.  Just last month, that attack submarine, the U.S.S. John Warner, was commissioned and launched into the fleet – ready for service.  This submarine is reported to be the most powerful attack submarine in the history of the U.S.  It is 7,800-tons and 377 feet in length, has a beam of 34 feet, and can operate at more than 25 knots submerged to depths greater than 800 feet.[13]  And, it is proof that high-tech projects can be completed early and under budget.   That’s what focus and resolve can achieve.

This is not simply a theoretical exercise.  The market events that occurred on August 24 of this year remind us of the critical need for a full audit trail.  Extreme volatility triggered the limit-up/limit-down rules that resulted in temporary trading halts over 1,200 times.[14]  This was a real-world test of the operation of the limit-up/limit-down pauses (circuit breakers).  Complex products, like ETFs, behaved in ways that were not expected.  There were discrepancies in the net asset values of ETFs compared to prices during the first few minutes of trading.   How the limit-up/limit-down rules operated, particularly with regard to ETFs, needs further examination and study.  In short, we have a lot to learn about what happened in our markets that day.  And we need the tools and data to do it. 

Unfortunately, without a tool like the CAT, we are at a significant disadvantage.  And while MIDAS is an important contribution to the SEC’s toolkit, it also needs an upgrade to include, for example, firm attributions (participant IDs) and privileged information, or so-called hidden orders.

As always, I am certain that the SEC staff will work hard to unravel the mysteries, and I hope that a public report will be shared soon.   But the need for additional transparency could not be clearer.  It goes without saying that repeated – and not entirely understood - dislocations in the market undermine market integrity and harm investor confidence.  Tools like the CAT and an upgraded MIDAS help us modernize oversight of the securities markets to ensure they are worthy of investors’ faith and trust.  That benefits the SEC.  That benefits market participants.  That benefits investors.  Ultimately, that benefits the economic well-being of our nation. 

Roles and Responsibilities

As I have noted, the speed of today’s market and the dominance of data contribute to a view of the markets that more happens below the surface than above it.  Restoring investors’ confidence in the integrity of our markets will require steps like I already mentioned – additional transparency for ATS operations and better oversight tools for the Commission.  But, it also requires us to reimagine the roles and responsibilities of those individuals and firms that function in a digitized, data-dominated securities market.  Here too, we would benefit from having added clarity and transparency.

Integrity, as you know, is built upon the relationships that market participants have with each other.  But in an age when algorithms interact more than traders, how do algorithms develop trust in one another?  That is, of course, a somewhat facetious question, but it highlights how we have not yet reimagined roles and responsibilities in the marketplace.

The more serious questions are:  Who is responsible for protecting the integrity of information?  Who is responsible when algorithms go awry?  And how does the trader’s obligation to ensure that the investor receives the best possible price fit into this world of nano-second trading?

I like to think of our markets as like our highway system – a public good that connects us and enables commerce.  So I have naturally been thinking about advances in the autonomous car, or the “driverless” vehicle.  Who is responsible for ensuring that the driverless car follows the rules of the road?  The programmer? The company who developed the car?  What about when the car crashes, who is responsible then? 

In the same way, as our markets have become “more and more robotic” or “driverless,” who is responsible for what?   And what are the obligations?

Over time, a set of defined and transparent roles and responsibilities developed in the human-dominated market.  These are the traditional roles that many of us still think of when talking about trading.  There needs to be transparency regarding roles and responsibilities in our new electronic markets as well.  Too often, when a technology problem arises or a trading algorithm malfunctions, I see business people point to programmers or technologists as the responsible party, who, in turn, point back to the business people.

You, as trading professionals, know that markets depend upon trust to function.  Might it be that our markets have experienced difficulties in recent years because, in the face of rapid technological development, we have yet to develop new ways to weave together its participants through bonds of trust, confidence, and accountability? 

In addressing this challenge, I come back to the basic fact that behind every algorithm, order type, and electronic trading network are human beings:  individuals program computers, individuals design trading algorithms, and individuals market products.  Individuals supervise and design compliance structures.  Regardless of the advancement of technology and innovation in our securities markets, humans – individuals – are necessary to what we do each and every day. 

All market participants need to be responsible for their work and, at the same time, its collateral consequences.  To do that, every individual within a securities organization – from the coder to the cybersecurity officer, the salesperson to the CEO – needs to understand the new electronic marketplace.  Everyone needs to be cognizant of how the work he or she is doing could affect the market as a whole, including from a technological and operational perspective.

Everyone involved also needs to know the rules of the road.  Without that, we lose transparency, we do not know who to trust, and confidence in the system diminishes.  Just as we license drivers and ensure that vehicles have basic requirements of safety and soundness, we should consider whether certain personnel are so vital in our increasingly “robotic” securities market that they should be licensed.  In a world where programming errors are just as damaging to investors as improper sales practices, our regulatory approach may need to evolve.

Complex organizational charts should not shield individuals from accountability.  It cannot continue to be the case that so-called “technological glitches” set off a series of finger pointing within firms.  Opacity must be replaced with transparency, including within firms themselves.  I will be following this issue closely and would like to see firms take it upon themselves to make these changes proactively.

On all of these issues, your expertise and views will be critical.  You all have a perspective on the market and its operations that is unparalleled.  Who should be licensed and how?  What is the best organizational structure to ensure that roles are clear? Overall, how can we all contribute to increased transparency, to increased accountability, and to increased understanding of who is responsible for what?   


In recent years, our securities markets have undergone rapid and significant transformation.  Just as with a volcano, the forces of change have largely come from below the surface.  Today, I’ve emphasized the need to bring light to some of the darker places in our market, to boost transparency in ATS operations, to get moving on a CAT that will add transparency, and to rethink roles and responsibilities.

Transparency along the lines of what I have discussed today would help bring greater clarity to the functioning of the market.  It would begin to address the concerns that the market advantages certain participants over others.  It would help refocus the market on contributing to the fair and efficient allocation of capital.  While transparency cannot do it all, it can go a long way towards restoring confidence and faith in the integrity of our marketplace.  “Our word is our bond.”  Staying true to this motto, we all will benefit.

[1] See 15 U.S.C. § 78k–1 (2012) (“The linking of all markets for qualified securities through communication and data processing facilities will foster efficiency, enhance competition, increase the information available to brokers, dealers, and investors, facilitate the offsetting of investors’ orders, and contribute to best execution of such orders.”); Securities Acts Amendments of 1975, P. Law. No. 94-29, 89. Stat. 97 (codified as amended in scattered sections of 12, 15, 26 U.S.C.); Subcomm. on Securities, S. Comm. on Banking, Housing & Urban Affairs, 93d Cong., Sec. Indus. Study (Comm. Print 1972).

[2] See, e.g., Commissioner Kara M. Stein, The Dominance of Data and the Need for New Tools: Remarks at the SIFMA Operations Conference (April 14, 2015), available at; Commissioner Kara M. Stein, Remarks before FINRA’s Division of Market Regulation (May 29, 2014), available at; Commissioner Kara M. Stein, Remarks to the Council of Institutional Investors (May 8, 2014),

[3] See Arin Ray & David Easthope, Dark Pools: In the Eye of the Storm (Nov. 20, 2013), available at

[4] Justin Schack, Let There Be Light: Rosenblatt’s Monthly Dark Liquidity Tracker, Rosenblatt Sec. Inc.: Trading Talk (June 25, 2015), available at; see also FINRA, Alternative Trading System (ATS) Transparency, available at

[5] In the Matter of ITG Inc. and Alternet Securities, Inc., Exchange Act Release No. 75672 (Aug. 12, 2015); (ITG paid more than $20 million, including an $18 million penalty (the largest SEC penalty against an ATS to-date), and admitted to wrongdoing, for operating a secret trading desk and misusing the confidential trading information of dark pool subscribers.)

[6] In the Matter of UBS Securities LLC, Exchange Act Release No. 74060 (Jan. 15, 2015); (UBS paid more than $14.4 million, including a $12 million penalty, for failing to properly disclose to all dark pool subscribers an order type that was marketed almost exclusively to market makers and high frequency trading firms, which allowed those participants to place sub-penny-priced orders that then received priority over other orders.)

[7] In the Matter of Latour Trading, LLC, Exchange Act Release No. 76029 (Sept. 30, 2015); (Latour will pay more than $8 million, including a $5 million penalty for violations of the market access rule (Section 15(c)(3) of the Exchange Act), which led to millions of orders violating the trade-through provisions of Regulation NMS.) 

[8] See Chair Mary L. Shapiro, Opening Statement at the SEC Open Meeting: Consolidated Audit Trail (July 11, 2012), available at

[9] Chair Mary L. Schapiro, Remarks at SEC Speaks: Looking Ahead and Moving Forward (Feb. 5, 2010), available at (“It is like trying to put together a jigsaw puzzle, but only being able to see a small part of the final picture. To see the complete picture, regulators must have access to a robust and effective consolidated order and transaction tracking system.”).

[10] Consolidated Audit Trail, 17 C.F.R § 242.613, available at

[11] On May 26, 2010, the Commission proposed a rule to require the self-regulatory organizations (SROs) to establish a consolidated audit trail system.  (See SEC Release No. 34-62174).   Rule 613 was adopted on July 11, 2012, requiring the SROs to jointly submit a plan for the creation, implementation, and maintenance of a consolidated audit trail by on or before April 29, 2013.  

[12] See, e.g., Commissioner Kara M. Stein, The Dominance of Data and the Need for New Tools: Remarks at the SIFMA Operations Conference (April 14, 2015),; Commissioner Kara M. Stein, Remarks at the “SEC Speaks” Conference (Feb. 21, 2014),; Commissioner Kara M. Stein, Remarks at the American Bar Association Business Law Section’s Federal Regulation of Securities Committee Fall Meeting (Nov. 22, 2013),

[13] Construction began on John Warner on April 29, 2009; the submarine’s keel was authenticated on March 16, 2013, the submarine was christened on September 6, 2013; cost $2 billion (under the Navy budget).  See

[14] Bradley Hope, Trading in Stocks, ETFs Was Halted More than 1,200 Times Early Monday, Wall St. J. (Aug. 24, 2015), available at

Last Reviewed or Updated: Sept. 30, 2015