Securities and Exchange Commission Historical Society

Transformation & Regulation: Equities Market Structure, 1934 to 2018

Emergence of the National Market, 2003 - 2018

Fine Tuning

The Commission faced strong public pressure to abolish high frequency trading and dark pools entirely, especially after the 2014 publication of the best-selling book Flash Boys, in which author Michael Lewis criticized high frequency trading and the regulators who allowed it to exist.

One of these regulators, SEC Chair Mary Jo White, noted in 2013 that “much of the current discussion around market structure seems rooted more in anecdote—and, at times, self-interest—than in evidence.” 58 At the start, the Commission had been determined to employ a light touch and let competition shape the National Market System. In the 2010s, the Commission continued to honor that commitment. Despite the uproar caused by the Flash Crash and Flash Boys, and regardless of continued market glitches, the SEC opted to fine tune rather than take drastic action.

One means of fine tuning was to impose circuit breakers. In June 2010, a single-stock circuit breaker pilot program was implemented by FINRA and the exchanges. If an S&P 500 stock experienced a 10 percent change in price during a five-minute period, a trading pause was imposed, as Chair Mary Schapiro put it, to “provide time for buyers and sellers to trade at rational prices.” 59 After that initial pilot, two other stages followed to cover securities in the Russell 1000 index and then all remaining equities. By 2012, the single stock program was being phased out as market participants implemented a more comprehensive plan. Rolled out in 2013 and 2014, the “limit up-limit down” (LULD) system operated on a market-wide basis, setting “price bands” outside of which trading would be halted. “It’s designed to prevent trades at absurd prices,” noted Division of Trading and Markets Deputy Director James Brigagliano. 60 Like the circuit breakers, LULD was rolled out in phases.

Another way to fine tune was to put regulations in place to ensure the technological integrity of market participants. In November 2010 the SEC approved Rule 15c3-5, the “Market Access Rule,” which provided that high speed traders could only have direct access to markets with which they were registered. Equally important, the rule mandated that broker dealers with market access had to have a set of risk management controls in place to prevent “fat finger” and other errors from affecting the larger market. The insufficiency of these mechanisms was underscored in 2012 when a major software failure occurred during the IPO of the BATS Exchange, the nation’s third largest. Two months later, Facebook’s IPO was delayed due to errors at NASDAQ. In August 2013, the NASDAQ securities information processor shut down entirely for three hours due to a software problem. The adjustment that followed was Regulation Systems Compliance and Integrity, adopted in 2014, requiring among other things that every exchange and ATS ensure the integrity of its automated systems by formalizing standards to which those systems would be held.

These measures were intended to avert market failure, but they did nothing about the perceived shortcomings of the equity trading arms race. Here the fine tuning was left to the private sector. While the SEC, FINRA, and the exchanges worked through circuit breakers and market access, some buy side firms remained unhappy with the highspeed marketplace. John Ramsay noted that “the fairness issues really were not grappled with, in some sense because maybe it was just harder to grapple with them in any kind of convincing way.” 61 The solution pioneered by Brad Katsuyama (the hero among villains in The Flash Boys who soon hired Ramsay as his chief regulatory officer) was to put a speed bump in the trading path, allowing customers using IEX routers to keep from being beaten by high frequency traders. The speed bump was really just a coil of fiber optic cable that slowed down market access by 350 microseconds—much faster than the blink of an eye. It seemed like just another gimmick until IEX obtained exchange status. Ironically, the market centers that had been investing billions in speed charged that IEX would gain an unfair advantage through slowness.

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(58) Mary Jo White,Focusing on Fundamentals: The Path to Address Equity Market Structure,” at

(59) “SEC Approves New Stock-by-Stock Circuit Breaker Rules,” at

(60) July 15, 2013 Interview with James Brigagliano, 32.

(61) June 7, 2017 Interview with John Ramsay, 43.

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Oral Histories

15 July 2014

James Brigagliano

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