And that's okay.  Chairman Mary Schapiro told a Security Traders Association audience, among other things, to expect the emergence of a market structure for security-based swaps that reflects the virtues of the current equities market: competition, access, liquidity and transparency.  Ms. Schapiro addressed these 5 areas (after the jump, we discuss #'s 1, 2, 3):

1. Improved Mechanisms to Avoid Another Flash Crash. 
   
2. Trading Obligations for High Frequency Trading Firms.
3. Appropriate Controls on Liquidity Seeking Algorithms.
4. Market Fragmentation.
5. New Market Structure Responsibilities under the Dodd-Frank Act.

    1.  Improved Mechanisms to Avoid Another Flash Crash.  The Flash Crash of May 6 illuminated the need for improved mechanisms to limit destabilizing price moves and to preserve fair and orderly trading.  According to Ms. Schapiro, we need to examine whether there are ways to prevent erroneous trades from triggering pauses while, at the same time, ensuring that pauses can be invoked when needed.

• Limit-up/ limit-down style trading parameters under which trades would have to be executed within a range tied to the NBBO - to prevent aberrant trades from occurring outside specified parameters, while still allowing trading to continue within the established limits.  Only if trading doesn't resume within those parameters and within a preset period of time, would a formal trading pause be triggered.  This pause would then give market participants time to establish a new price in a fair and orderly fashion.

• Parameters that trigger circuit breakers must be set at a level that preserves the stability and integrity of the equity markets - e.g., many firms that supply significant liquidity to the market have programmed their systems to pull back or to shut down when prices move atypically. In effect, these firms have adopted their own ad hoc circuit breakers.  Which ties into the question ...

• Coordinating circuit breaker parameters and trading obligations.  What, if any, obligations should apply to significant liquidity-providing firms. It's important to recognize that they are closely related, and that the rules governing each should be coordinated so that the market is appropriately protected in stressed conditions.

    2.  Trading Obligations for High Frequency Trading Firms.  Close review needs to be given to the regulatory scheme that applies to the most active and sophisticated participants in today's market structure - high frequency trading firms - which, by most estimates, account for over 50% of daily trading volume.  Ms. Schapiro critically notes that these estimates reflect 2-sided volume - i.e., high frequency trading firms participate as either buyer or seller in the great majority of trades, particularly in the publicly quoted markets where these firms' trading is concentrated.  Accordingly, the SEC will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including both their quoting and trading strategies.

    3.  Appropriate Controls on Liquidity Seeking Algorithms.  The SEC has seen aggressive liquidity-seeking algorithms flood the market with executable orders far beyond the normal volume for a stock - e.g., one of the new, individual stock circuit breakers was triggered when an algorithm attempted to execute 10% of the stock's average daily volume in 2 seconds.  Orders like this can create sudden liquidity imbalances that quickly drive prices up or down  Therefore, new trading tools may need to be subject to appropriate rules and controls

• Are algorithms programmed with appropriate throttles that prevent them from operating in an unintended manner?
  
• An out-of-control algorithm can seriously harm the firm that uses it, and can cause severe trading disruptions in the marketplace.  

For further details, click onto:   [ SEC Chairman Speeches, 9/22 ].