May 6 was a calamitous day for U.S. capital markets, a twenty-minute nightmare that saw stocks tumble nearly 1,000 points, and seemed to encapsulate everything that critics of our current market structure had been predicting.
It was a watershed moment—and not just because the market's dizzying descent and equally quick recovery has so diminished investor confidence — but because four months later, serious questions about the credibility of our markets still remain.
There are some things, however, about which we can be certain: that there have been profound and systemic changes to the structure of our markets over the past few years. The vast majority of stocks are no longer traded on the floor of the New York Stock Exchange, despite the predictable images of shouting traders that accompany almost every TV newscast about the markets.
Instead, trading is scattered among more than a dozen public venues, at least 32 dark pools—where stocks are traded away from public view—and some 200 broker-dealers who can execute trades internally.
In this fragmented marketplace, trading can take place in the blink of an eye, as computer algorithms pump out buy and sell orders with great frequency and at lightning-fast speeds. It is a mind-boggling state of affairs, a 'micro-arms race' devoted to shaving millionths of a second off of transaction times, but not necessarily serving investors or facilitating capital formation.
Unfortunately, we have yet to study thoroughly, much less understand, the full effects of these structural changes on the entire marketplace and especially on average investors.
I have written to Securities and Exchange Commission Chairman Mary Schapiro several times over the last year, calling on her to accelerate the Commission’s efforts on this issue.
As I told her in the most recent letter I sent last month, at a minimum the Commission "must end the current ‘wild west’ environment of ‘anything goes’ in the microsecond trading world and replace it with a sense that trading activity is being actively monitored and policed for illegal trading behavior.”
As for broader market structure reforms which I and others have suggested the Commission should consider, in my view, the aftermath of the May 6 flash crash is "an historic moment for the Commission, a moment when it must fulfill its obligation as the steward for those investors who lack the clout of Wall Street's largest financial players."