Testimony on U.S. Equity Market Structure by the U.S. Securities and Exchange Commission
by Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
Before the Subcommittee on Securities, Insurance, and Investment of the United States Senate Committee on Banking, Housing, and Urban Affairs and the United States Senate Permanent Subcommittee on Investigations
December 8, 2010
Chairmen Reed and Levin, Ranking Members Bunning and Coburn, and members of the Subcommittees:
Thank you for the opportunity to testify on behalf of the Securities and Exchange Commission concerning the U.S. equity market structure.
Market structure encompasses all aspects of the organization of a market, including the number and types of venues that trade a financial product and the rules by which they operate. Although these issues can be complex and the rules technical, a stable, fair, and efficient market structure is the backbone of the equity markets and an important engine of our economy.
My testimony today will note some important recent market structure developments and discuss the Commission's ongoing review of our market structure. In particular, we have undertaken a broad-based appraisal of both the strengths and weaknesses of our current equity market structure. This review includes an evaluation of recent market structure performance and an assessment of whether market structure rules have kept pace with recent significant changes in trading technology and practices. The goal of this evaluation is to effectively address any market structure weaknesses while preserving its strengths.
In addition, the SEC published a concept release on equity market structure in January 2010 (the "Concept Release"). The Concept Release described the current market structure and then broadly requested comment from the public on three categories of issues: (1) the quality of performance of the current market structure, (2) high frequency trading, and (3) undisplayed liquidity in all its forms.
The Commission has received more than 200 comments on the Concept Release. A number of commenters identified benefits of the current market structure, in particular noting that it has fostered competition among trading venues and liquidity providers that has lowered spreads and brokerage commissions. These investors cautioned against regulatory changes that might lead to unintended consequences. Other commenters, however, raised concerns about the quality of price discovery and questioned whether the current market structure continues to offer a level playing field to investors in which all can participate meaningfully and fairly. These commenters suggested a variety of initiatives to address their concerns.
Following up on the written comments, the Commission hosted a public roundtable on market structure in June. The roundtable participants, who included listed companies, investors, exchanges, market makers, high frequency traders, broker-dealers, agency-only brokers, and economists, offered a wide range of perspectives and recommendations. The debate at the roundtable was spirited and extremely helpful to the Commission in its efforts to obtain a deep understanding of complex policy issues.
The Commission's job in the coming months will be to evaluate these issues in a responsible, timely, and comprehensive fashion, with particular focus on obtaining the appropriate data and analysis to support our decisions to proceed with or to table any particular initiative. A few basic principles will guide our actions.