Breaking the

Boom-Bust-Bailout
Cycle
Banks involved in
high-risk, high-return
investments that are
largely unregulated

?
? ? CRASH
?
High Risk
?

Banks back doing OLD

high-risk, high-reward practices, U.S. Government
bailout – taxpayer dollars
have added new risky practices, and
are once again posting billions in profit.

No reform
 FINANCIAL DEBACLE
OF 2008
Rapid and Dramatic
Change in Market

+
No Regulation

+
Opaqueness

=
CREDIT DEFAULT SWAP DISASTER
FINANCIAL DEBACLE
OF THE FUTURE?
Rapid and Dramatic
Change in Market

+
Opaqueness

+
No Effective
Regulation

=
HIGH FREQUENCY TRADING
SYSTEMIC DISASTER?
 RAPID AND DRAMATIC
CHANGE IN MARKET

High frequency trading

has increased from
30 to 70 %
of daily volume

Dark pools have gone from

1.5 to 12%
of daily volume

Flash orders, co-location of servers, sponsored access

– all arose without prior regulatory approval
NO EFFECTIVE REGULATION
“There is much more to be done in the areas of
frontrunning, manipulation, abusive short selling, and just
having a better understanding of who is moving the
markets and why. …In its place are now two or three or
maybe four regulators, all looking at an incomplete picture of
the market and knowing full well that this fractured
approach does not work.”
- Rick Ketchum,
Chairman & CEO, FINRA
October 27, 2009

THE SEC WILL ONLY BEGIN TO REVIEW

HIGH FREQUENCY TRADING
NEXT YEAR…
WHERE IS THE SENSE OF URGENCY?
 OPAQUENESS
“There are impediments to regulatory
effectiveness that are not terribly well
understood and potentially damaging to the
integrity of the markets.”

“We need more information on the entities

that move markets — the high-frequency
traders and hedge funds that are not
registered. Right now, we are looking
through a translucent veil, and only seeing
the registered firms, and that gives us an
incomplete —if not inaccurate —picture of
the markets. In short, there is a lot of work
ahead, but not a lot of time.”
– Rick Ketchum,
Chairman & CEO, FINRA
October 27, 2009

WHERE IS THE SENSE OF URGENCY?

HIGH FREQUENCY TRADING
SYSTEMIC RISK
“At 1,000 shares per order and an average price of
$20 per share, $2.4 billion of improper trades could
be executed in [a] short timeframe…The next ‘Long
Term Capital’ meltdown will happen in a
five-minute time period.”
- John Jacobs,
Director of Operations, Lime Brokerage
June 30, 2009

“[Sponsored access] presents a variety of unique

risks and concerns, particularly when trading firms
have unfiltered access to the markets. These risks
could affect several market participants and
potentially threaten the stability of the markets.”
- Elisse Walter,
SEC Commissioner
October 21, 2009

WHERE IS THE
SENSE OF URGENCY?