Just ahead of a reworking of rules governing stock markets, Securities and Exchange Commission Chairwoman Mary L. Schapiro made it clear how she feels about high-speed computerized trading, secretive dark-pool networks and other regimens that make trades nearly invisible to ordinary investors.
"High-frequency-trading firms are subject to very little in the way of obligations," she said in a speech delivered at a conference of stock and bond traders, "either to protect stability by promoting reasonable price continuity in tough times, or to refrain from exacerbating price volatility."
And as for dark pools — private networks used by big-time traders to avoid revealing details of transactions — Schapiro said they create "potential conflicts of interest that could cause their orders to be handled in ways that may not be consistent" with the best interests of ordinary investors.
The comments come as the SEC is developing new exchanges for complex securities called derivatives and is also rethinking existing markets in the wake of the financial reform legislation passed by Congress in July.
The SEC is also about to release its highly anticipated investigation of the May 6 so-called flash crash, during which the Dow Jones industrial average dropped more than 700 points in just 15 minutes. Analysts have blamed the crash on computerized, high-frequency trading.
High-frequency traders, who use computer programs that allow them to place thousands of trades per second, account for more than half of all stock trades and have largely replaced the traditional market makers who worked at the New York Stock Exchange.
High-frequency-trading firms have defended themselves by pointing to the speed with which the flash crash corrected itself without new regulations. More broadly, they say they are responsible for the increased liquidity and lower transaction costs on current markets.
But brokers have told the SEC that the flash crash shook up investors to the point that it helped cause the volatility and low trading volumes that have plagued the stock market since May.
The agency has been tight-lipped about the findings of its investigation, but Schapiro's speech Tuesday, and one delivered two weeks earlier, makes it apparent that she has reached her own conclusions about the problems — and the need for change.
It would be wrong "to ignore the issues raised by high-frequency trading," she told the traders, "or to assume that market structure and the rules of the road can't be adjusted and improved."