Who's regulating the regulators?  Apparently, the Securities and Exchange Commission currently is closely scrutinizing stock exchanges for failure to disclose material changes to their businesses.  It's 1 of some 20 different areas of inquiry by the SEC into how electronic marketplace works. The SEC's interest extends from the type of orders the exchanges devise to allow their clients to execute is interested in everything from types of orders devises for exchange clients, their features, and how they are handled, to ascertaining the effectiveness of self-policing procedures. Electronic exchanges that handle trade executions at lightning speed, are at the center of these SEC inquiries.  Every day these exchanges process hundreds if not thousands of orders that have the potential to become, what one exchange official calls, "game changes." Unlevel treatment of customers is a standard concern of the Commission, particularly with the e-exchanges who may have wired their business in such a way as to provide certain clients with preferential treatment. BATS Glitch on IPO Day. The inquiries also coincide with an embarrassing technical glitch in March that derailed the much-anticipated IPO of one of the fastest-growing electronic exchanges.  Failure to disclose could lead to enforcement actions by the SEC, although fraud or illicit conduct have not been a major focus, BATS Global Markets Inc., these people told Reuters.  Exchanges need to disclose rule changes and get the SEC's approval.  Disclosure issues tripped up exchange operator Direct Edge, which the SEC sanctioned in October after an affiliated routing broker engaged in proprietary trading, even though the exchange's rules forbade such transactions.  It is also one element of the SEC's probe into BATS, which said in February that regulators sought information about certain order types and its communications with market participants.  One person familiar with the matter said that the SEC is looking at whether BATS should have filed certain rules disclosing how its order types work, and also whether those order types may give some market participants an advantage over others. BATS declined to comment. Exchanges act as SROs, which means they must police their own markets for abuse.  The exchanges are called SROs because of that distinction.  Exchanges must file SRO rules with the SEC any time a material change is made.  Those rules are vetted through a public comment process, and the SEC can also intervene if it feels the proposed rule violates certain legal provisions, such as an anti-discrimination clause that prevents exchanges from favoring one group of clients over another.  But over the years, as more exchanges have gone from member-owned organizations to profit-driven public companies, regulators say that the quest for profit has at times trumped self-regulatory responsibilities.  Moreover, in today's world of multiple trading venues and trades measured in microseconds, the way things actually work on an exchange is not always properly communicated in an SRO's own rules.  Historically, there have always been problems with exchanges at times failing to make the proper rule filings.  However, after the flash crash the SEC stepped up its scrutiny of exchange oversight and started to discover repeated failures in this area.  Now, the SEC has also become much more willing to recommend enforcement action for technical violations that in the past might have flown under the radar. Click to access referenced story:  [Reuters, 4/4/12].