SEC Chief Mary Schapiro, speaking at the Economic Club of New York, as expected addressed market structure issues in her speech.

While there are no new proposals in the speech, and she asks more questions than she answers, she does hint at the direction the Flash Crash report may be going, which is expected by the end of September.

After reviewing the role high frequency firm play in the market (more than 50 percent of the volume), she concludes, "This transformation of market structure has raised serious questions and concerns."

Indeed, she notes that in a recent survey of buy-side traders, less than 50 percent expressed confidence in the current market structure.

On circuit breakers: re-examine and tweak.

Rather than stopping all trades in a stock for 5 minutes if a single trade occurs 10 percent away from the stock price in a 5-minute period, she proposes a limit up/limit down procedure that would directly prevent trades outside specified parameters. So rather than a total halt, trading may be allowed to occur within parameters; for example, it could trade at less than 10 percent, but not more, in a specified time period.

On high-frequency trading: should they have some obligations as liquidity providers? They are not market makers, so they have minimal obligations. But Schapiro notes that in the Flash Crash, order book liquidity disappeared: "Where were the high-frequency trading firms that typically dominate liquidity provision in those stocks?"

Market fragmentation: She notes market liquidity has fragmented: "Today, the NYSE executes approximately 26 percent of the volume in its listed stocks. The remaining volume is split among more than 10 public exchanges, more than 30 dark pools, and more than 200 internalizing broker-dealers."

Of course, the SEC consciously encouraged this fragmentation under the guise of "encouraging competition."

She is particularly concerned about the role of dark pools and internalizing broker-dealers, who do not display their bids and offers to the outside world; together they are almost 30 percent of total volume. Is the public being disadvantaged by this practice?

Schapiro concludes: "The structure of today's markets undoubtedly offers many advantages. And, we should not attempt to turn the clock back to the days of trading crowds on exchange floors. But we must carefully consider whether our market structure rules have kept pace with the new trading realities."

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