In an August letter to the Securities and Exchange Commission that detailed its longstanding concerns, the Securities Industry and Financial Markets Association – which represents securities firms, banks and asset managers – made its case that regulators should reexamine whether exchanges, among them the New York Stock Exchange and Nasdaq, should have rulemaking and enforcement authority over their members.

The association may have a powerful ally who shares their concerns about those quasi-regulatory powers and accompanying liability protections based on remarks made by SEC Chairman Mary Jo White during a speech before the Security Traders Association in Washington, D.C. on Wednesday.

“The current nature of exchange competition and the self-regulatory model should be fully evaluated in light of the evolving market structure and trading practices,” she said. “This evaluation should include whether the current exchange regulatory structure continues to meet the needs of investors and public companies. Does it provide sufficient flexibility for exchanges to implement transparent trading models that can effectively compete for investor orders? Does the current approach to self-regulation limit or support exchange trading models?”

This evaluation should also assess “how trading venues can better balance their commercial incentives and regulatory responsibilities,” she said. "Is there an appropriate balance for exchanges in key areas, such as the maintenance of critical market infrastructure? And are off-exchange venues subject to appropriate regulatory requirements for the types of business they today conduct?”

White's statement echoes many of the concerns raised by Theodore Lazo, SIFMA's managing director and associate general counsel, in his association's August letter to White. “Exchanges face an irreconcilable conflict of interest in the performance of their SRO responsibilities,” he wrote. “On the one hand, they are bound by a fiduciary duty to maximize profits for their corporate shareholders. On the other hand, they are required to be fair and impartial regulators of the broker-dealers with which they compete.”

“One group of businesses is empowered to oversee and regulate the business and activities of its competitors,” Lazo added. “Conflicts of interest in this model abound and only worsen as they are left unresolved.”

SEC Commissioner Daniel Gallagher has expressed similar concerns.

In her speech this week, White also addressed the SEC's efforts to improve the nation's equity markets. She cited a statistic that the number of U.S.-listed companies has declined to approximately 4,900 from a high of more than 8,000 in 1997.

Given the increased use of sophisticated technology and algorithms by traders, there needs to be a heightened focus on “operational integrity,” she said, taking the opportunity to announce the latest phase in its MIDAS (Market Information Data Analytics System) initiative. The data collection and analysis system, which went live earlier this year, collects nearly 1 billion trading records and other data from exchanges each day.

Over the last two years, the equity and options markets have been experienced various “flash crashes” and glitches that have led many to question market integrity, White said. These include systems failures at exchanges and problems at broker-dealers with order routing systems. An Aug. 22 glitch led to a trading halt in Nasdaq-listed stocks for several hours.

“We should not confuse these events as the byproducts of high-frequency trading or activity in dark venues, as some often do,” she said. “These events involved relatively basic, albeit serious, errors.”

In 2010, the SEC addressed operational integrity at broker-dealers when it adopted the Market Access Rule and its demand for improved risk management controls. White urged industry participants to also get behind Regulation SCI, proposed rulemaking that requires improved systems compliance, resilience, and integrity. She also met last month with executives of the exchanges and challenged them to together develop and implement “comprehensive action plans” to improve resiliency.

The SEC also adopted the Large Trader Reporting Rule to more efficiently collect information on trading activity, in particular high-frequency traders. A Consolidated Audit Trail Rule, when implemented, will further enhance its ability to monitor the equity markets.

Building upon these efforts, White announced a new initiative to disseminate data drawn from MIDAS and other sources on a dedicated website. The new site, available as early as next week, will serve as a central location to post and share trading related SEC data, research, and analysis, allowing users to study the tens of billions of MIDAS records collected over the last year.

“Not only are we making these analyses available, we're making them accessible,” White said. “Results will be available in clear, easy-to-read charts and graphs. We expect this new tool to transform the debate on market structure by focusing it as never before on data, not anecdote.”

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