Charlie Rose Talks to Mary L. SchapiroBy
Everybody's waiting for the [financial reform] rules to be defined. How do you view that task?
I view it as enormously important that we get it right. We have to deliver a set of cogent, responsible rules that animate and implement the Dodd-Frank legislation. We have over a hundred rules to write, more than 20 studies to conduct. We have to create five new offices within the SEC. We're involved in over-the-counter derivatives, hedge fund regulation, credit-rating agencies, fiduciary duty, corporate disclosure requirements. We've got multidisciplinary task forces working on each set of rules. We're pushing out proposals at a pretty good clip, largely [for] those that are required to be implemented by July 2011.
Was the settlement with Goldman Sachs (GS) intended to send a message that this is a new sheriff in town?
No, it was intended to address what we saw as violations of the federal securities laws. It also hopefully informed the industry about conduct that we think is problematic.
What happened on May 6?
May 6 was a really unfortunate experience for our markets and for American investors. In the space of several minutes, the Dow declined 573 points, and then in even less than several minutes recovered by 543 points. We can't have a system here where people are uncomfortable about the integrity of the marketplace. We'll never take all the risk out of investing, nor should that ever be our goal. But if confidence in the integrity of the marketplace is even a small reason for investors to pull out, I think that's a terrible thing. We have to get to the bottom of fixing the fragmented and loose structure of our markets that contributed to that.
How are you going to do that?
We've done a number of things already that we think have made an enormous difference. Immediately after May 6, we brought in all the exchanges and quickly got agreement to put into place circuit breakers that require that if a stock moves more than 10 percent up or down in five minutes, trading in that stock is halted for five minutes while the primary listing market has the opportunity to gather liquidity and reopen the stock at a more rational price. We had some stocks execute at $100,000 a share on May 6; you don't hear as much about those as the ones that executed for a penny. The single-stock circuit breakers, which initially applied just to the S&P 500, now have been extended to the Russell 1000 and hundreds of ETFs and have made quite a big difference. They've been triggered about a dozen times, which has been an interesting laboratory for us.
The real problem was nobody knew going into the process, at what price would trades be broken? That caused some liquidity providers to not be in the market because they were afraid they would put on a trade that would be broken because there was no clarity around what levels of pricing would result in broken trades. That issue's been resolved with the new erroneous trade break rules. We also passed a final rule that says a broker-dealer can't allow a customer to directly access the marketplace without going through the broker-dealer's risk management controls. Had that rule been in place over the last six months, some erroneous trades would never have gotten into the marketplace.
But now we have a lot of other things on our plate that we need to do that are a direct response to May 6. So we're looking at broader market structure issues. Should market makers have obligations again to buy and sell in volatile markets? Should we have more robust regulation of high-frequency traders?
Where are you on that?
We're getting close. We put out a concept release back in January, and we asked hundreds of questions about what is the role of high-frequency trading in our markets? Is it a good role, is it a negative role? What's the role of algorithms? Should algorithms be required to be programmed with throttles to slow them down or change their conduct depending upon different activities happening in the marketplace? Should we have greater transparency about what activities are taking place in our markets?
All of these issues have been out for comment. We've gotten hundreds of thoughtful comment letters, and now we're in the process of laying out a road map for our commission to think about all the discrete actions that we could take—building on the ones we've already taken—that we hope will lead us to a more stable marketplace.
The interview was conducted at the annual meeting of the Securities Industry and Financial Markets Assn.
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