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SEC to Conduct Broad Review of Equity Market Structure

At yesterday's open meeting, the SEC approved a concept release requesting comment on market structures like high frequency trading, co-locating trading terminals, and dark pool trading.  In the Commission's press release, they explain the reasons for requesting public input on these topics:

The U.S. equity markets have undergone significant change in recent years from a market structure that relies on people shouting on the exchange floors to one that relies on advanced computer technology. The speed of trading has accelerated from seconds to milliseconds to microseconds. Trading volume has expanded, and new trading centers have entered the markets and captured a significant share of volume. Liquidity is now dispersed among many different venues, and these venues offer a complex array of order types and other trading services.

In conducting this review, the Commission seeks to ensure that the current market structure serves the interests of long-term investors willing to accept the risk of equity ownership over time and are essential for capital formation. These investors include individuals who invest directly in equities, as well as retirement plans and other institutional investors that invest on behalf of many individuals.

When published, the concept release will request comment on specific aspects of the current equity market structure, as well as more general comments on the state of the current systems and potential improvements. Concept releases are typically used by the Commission to gauge the need for new or additional regulation or other action by the SEC.  The final concept release will be available in upcoming weeks. 

In her statement about the concept release, Chairman Schapiro listed some of the specific areas of concern to the Commission:

[T]he Commission already has engaged in several rulemaking proposals to address specific issues — such as a proposal to ban flash orders, a proposal to bring greater transparency to dark pools of liquidity and our earlier proposal to prohibit unfiltered access.

But, at the Commission, we must continually assess how changes in the market are affecting investors. And, we must try to understand how these changes may impact the markets in the future — so we can steer clear of any unnecessary risks.

For this reason, today we are considering whether to seek public comment on a variety of issues related to the current market structure. The concept release would raise questions about three broad categories.
  • First, it asks about the performance of the market structure in recent years, particularly from the standpoint of long-term investors;   
  • Second, it seeks comments on the strategies and tools used by high frequency traders, such as co-location services; and
  • Third, it asks about dark liquidity in all of its forms, including dark pool ATSs, OTC market makers, and undisplayed order types on exchanges and ECNs.

 . . .

It also asks:

Does the current market structure support the capital raising function for companies of all sizes?

How do we measure, for all types of investors, how they have fared in the markets?

What is the impact of the rising prominence of proprietary firms that trade in very large volume — often loosely referred to as high frequency traders?

Do their high-speed systems and enormous message traffic threaten the integrity of trading center operations and present systemic risk?

Or, have they brought greater liquidity and efficiency to our markets?

What is the impact on the quality of our markets from the large volume of trading that occurs in the “dark” — that is at trading centers where trading interest is not included in the consolidated quotation data widely available to the public?

The full text of the Commission's announcement is available at:

The full text of Chairman Schapiro's remarks is available at: