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Opening Remarks: SIFMA’s 13th Annual Market Structure Conference
October 15, 2012
[ by Larry Goldfarb]
Randy Snook, Executive Vice President, Business Policy and Practices, of SIFMA gave the introductory remarks at the 13th Annual Market Structure Conference on October 4th.
"Good morning. I’d like to welcome all of you to SIFMA’s 2012 Market Structure Conference. We meet here facing a host of issues affecting how our equity markets operate, and how those issues impact investor confidence. The lingering memories of the Flash Crash, along with more recent events showing the dramatic impact of technology failures, continue to test investors’ confidence in our markets.
Investor confidence is critical to maintain the success and strength of the equity markets. When investor confidence is hurt, it is in our collective interests to restore it. Let’s start with a fundamental truth: the U.S. capital markets are part of our critical economic infrastructure.
The U.S. economy depends on the capital markets to foster an entrepreneurial climate and create jobs. The strength of the capital markets is tied to investor confidence in the markets’ effectiveness, and investor confidence is increasingly linked to the efficient operation of the equity markets.
Despite the peaks and valleys, today’s markets have nearly recovered. The Dow Jones Industrial Average is now approximately 96 percent recovered from its pre-financial crisis peak and over 15% higher than the values from the peak valuation of the internet bubble era. While some of the more recent issues have been significant, it is important to note that they did not have a systemic effect on the markets. Yet, the investing public has lost some confidence in the way the markets operate. A perception has emerged within the investing community that technology has put some at a disadvantage. And the complexity of equity market structure may have discouraged some investors and lead them to remain sidelined. The markets have substantially evolved over the last decade. They have become significantly more dynamic, but at the same time significantly more complex.
Ten years ago you could count on one hand the number of exchanges. Today’s equity markets now includes 13 national securities exchanges and more than 40 dark pools. You’ve also seen the rise and evolution of computerized and algorithmic trading and the decrease of human traders on trading floors – if those trading floors even actually physically exist anymore. Some of that evolution has been driven by regulatory developments, starting with decimalization, extending through Regulation NMS, and continuing with the changing roles of exchanges.
However, technology has been the defining factor in market evolution. Technological innovation has increased the liquidity and efficiency of the markets and led to narrower spreads and lower transaction costs. But at the same time, we’ve seen that today’s highspeed markets can rapidly exacerbate the effect of errors and can magnify the perceived differences between market professionals and retail investors. These factors have led many in the investing public to wonder if our markets reflect true fundamentals or have simply become a race against time. In recent years, the industry has worked closely with regulators to react promptly and constructively to address market issues.
- The SEC worked very quickly with the industry to put into place the current single-stock circuit breakers to address the immediate concerns raised by the Flash Crash. The limitup/limit-down plan should provide an even more sophisticated mechanism to prevent the extremes in volatility which we are supportive of.
- We supported the updating of the market-wide circuit breakers that were initially put in place in response to the 1987 market crash.
- And the Consolidated Audit Trail –CAT – is a particularly important initiative because it will give regulators the tool to have increased transparency to better understand market activity.
- This week, the SEC took another important step by convening a roundtable of experts to discuss the effects of technology on the U.S. markets. We applaud the SEC for taking this initiative.
All of those initiatives have strengthened the marketplace with a view toward increasing investor confidence, but we cannot attack these issues in a piecemeal fashion. The industry, regulators and exchanges need to take a broader, more comprehensive approach. Only then can we hope to develop a smart, workable regulatory paradigm for how our markets operate today and how they will continue to operate into the future.
For example, we should look at the overall impact on the markets of technological advances with a keener eye to the way trading at high speeds can amplify the effect of even minor issues. An industry working group of SROs and broker-dealers has worked thoughtfully to suggest possible “kill switch” mechanisms and other means to preserve the integrity of the markets and prevent unnecessary extreme volume. At the end of the day, our job is to maintain the confidence of our customers: the investing public. At the same time, it is incumbent upon us to make sure that investors’ confidence in the markets is driven by informed evidence rather than informal commentary.
Today’s outstanding roster of speakers and panelists will consider all of these questions as we work towards developing smart and workable regulatory solutions that benefit the investing public by increasing the strength and efficiency of the market.
This morning we’ll hear from SEC Commissioner Dan Gallagher, who has been a thoughtful and constructive participant in the discussion of market structure issues, and he’ll give us a sense of the SEC’s priorities in this area. We’ll also hear from Representative Steve Stivers of Ohio. As a member of the House Financial Services Committee, Congressman Stivers sits at the crossroads of public policy making that will have a direct impact on our markets. Before we begin the program, I’d like to take a moment to thank all of our sponsors. This conference has a long history of commitment from our members. Our sponsors provide the foundation for this meeting, which continues to be a premier forum for exploring and analyzing cutting edge issues.
Please join me in recognizing our sponsors for supporting this year’s conference:
- Davis Polk, particularly for sponsoring the continental breakfast.
- As well as: Citadel, Direct Edge, eFinancialCareers, Goldman Sachs, ITG, and Sidley Austin.
With that I’d like to introduce today’s keynote speaker. We are very pleased to have SEC Commissioner Dan Gallagher here today. Commissioner Gallagher took office in November last year. For many years now, he has been a leading expert in the dialogue on equity market structure. With previous experience in the industry, private law practice, and as a regulator, Commissioner Gallagher has brought to the SEC a wide degree of knowledge and perspective.
Before joining the Commission, Commissioner Gallagher was a partner in the Washington D.C. office of WilmerHale, and most of us here today benefitted from his expertise and good counsel on market structure issues. From 2006 to 2010, Commissioner Gallagher was a senior member of the SEC staff, first as a counsel to Commissioner Atkins and later as a counsel to Chairman Cox. In 2008, Commissioner Gallagher was named a Deputy Director of the SEC’s Division of Trading and Markets and later served as an Acting Director of Trading and Markets. During his time in the Division, he played a key role in the SEC's response to the financial crisis and other key issues before the Commission at the time, including credit rating agencies and credit default swaps. Prior to his initial SEC service, Commissioner Gallagher was the General Counsel at Fiserv Securities, Inc. Please join me in welcoming Commissioner Dan Gallagher."
For further details, go to [SIFMA, 10/4/12].
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