In remarks at the SEC
Market Technology Roundtable, she noted that the SEC has in place single-stock
circuit breakers to prevent stocks from falling too far and too fast. The
Commission has also approved a more advanced limit up/limit down mechanism to
limit excessive volatility. The SEC also has imposed a ban on stub-quotes
and adopted rules clearly defining when a trade can be broken so as to help
avoid circumstances that can lead to disorderly trading.
SEC rules ban naked
access and require rigorous pre-trade risk controls designed to help mitigate
disruptive trading at the source. Other regulations require large traders, many
of whom use high frequency trading strategies, to identify themselves so that
the SEC can better monitor and analyze their trades, said Chairman Schapiro, a
process that other regulators overseas are beginning to emulate. Additionally,
and perhaps most importantly, the SEC requires SROs to develop plans for the
first ever consolidated audit trail, which will allow regulators to surveil and
reconstruct trading across platforms.
But, added Chairman
Schapiro, there are issues around market structure and the conduct of market
participants that the SEC should further examine, including the high volume of
cancellations, a proliferation of order types, transparency, high frequency
trading generally, potentially manipulative trading strategies, and data
latencies for public investors. She emphasized that these issues still require
attention and that the SEC is committed to addressing them.
Market
infrastructure is essential to any holistic approach to improving how the
financial markets operate, said the Chair, noting the IPO of BATS on its own
exchange, and the IPO of Facebook on the NASDAQ exchange. Though there
are many views regarding the fragmented nature of simultaneous trading across
multiple venues, she believes that these IPO events evidence a very different
set of concerns. Both events involved one of the few single-exchange
processes that remain in an otherwise fragmented market, namely, building a single order book and
crossing trades at a single price to open trading for a new public company.
In the case of BATS,
it was a flaw in new software code designed to conduct a corporate IPO
auction. That mistake caused the matching engine for tickers in a certain
range to enter into an infinite loop, making these tickers, which included the
symbol for BATS itself, inaccessible on BATS.
In the case of
NASDAQ, the IPO software was designed to accept cancellations submitted while
the final IPO price is being calculated. Cancellations received during
this time changed the order book. By design, the system recalculated the
final IPO price to factor in the new state of the book. But again,
changes were received before the system could print the opening trade, which
resulted in additional re-calculations. This condition persisted, resulting in
further delay of the opening print. These single-exchange problems are not a
result of complexities or fragmented markets, she concluded, but rather a
result of more basic technology 101 issues.