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Company Filings More Search Options. Thank you, Jim [Toes], for that kind introduction. I am honored to join you again for your annual market structure conference. Optimizing market structure is a continuous process, one that requires the Commission to act with both care and intensity, strictly guided by what is best for investors and capital formation for public companies.
I emphasized this guiding principle when I last joined you in ,  and in when I laid out a program for enhancing equity market structure.
But it also requires the Commission to carefully consider changes to market structure where the impact on those interests is far less clear and the data to support competing perspectives is lacking or conflicting.
Where improvements to equity market structure are clearly called for, the Commission has acted. The operational integrity of our markets — my top priority — has been significantly enhanced by a number of measures.
The staff is gathering and analyzing more market data than ever before to inform policymaking, and the consolidated audit trail is becoming reality. And we have detailed proposals out for comment that will give investors more transparency into how the off-exchange markets operate and broker-dealers handle their orders. At the same time, the Commission has undertaken a deliberate, data-driven process to assess — and, as appropriate, begun to implement — more fundamental changes to equity market structure.
This process requires great care. The American equity markets today continue to serve well the interests of retail and institutional investors, delivering better executions at lower costs than ever before.
Broad changes to this market structure — especially those executed precipitously or without adequate data — can have serious unintended consequences for investors and issuers as their impact is fully realized, sometimes years down the road. Today, I want to report on some of our progress on both our targeted enhancements to tackle such issues, and our consideration of more fundamental market structure questions.
While the Commission has been active in a number of areas, I will focus today on operational integrity, market transparency, and algorithmic trading.
Especially in addressing some of the more complex issues in market structure today, the EMSAC, which brings deep expertise and a wide range of perspectives, provides a public forum for valuable and timely discussions, both within the Committee itself and as a result of its efforts to reach out to a wide range of others with expertise on key issues.
Let me begin where I always do, with operational integrity and market stability. Since I arrived at the Commission, enhancing the reliability and resilience of our markets has been my top priority. Weaknesses or disruptions in operations can destabilize markets and, in some cases, lead to extreme price volatility and the loss of investor confidence. It is apparent from these examinations that many market participants have devoted significant resources to compliance, and there has been good progress in implementation.
But a few areas for additional attention have emerged. For example, it is clear that processes for patching and updating systems deserve close attention — human errors in these routine tasks can create much more significant issues.
Another example is diversifying primary and backup systems — in seeking to fulfill their recovery obligations under Regulation SCI, market participants should focus on not just the geographic locations of those systems, but also consider their reliance on different electrical, telecommunications, and other infrastructure support.
Our staff is continuing to work with market participants in these areas and others to help ensure that the goals of Regulation SCI are achieved. These cooperative efforts were expanded after the unusual volatility of August 24, , and there has been significant progress.
One such issue is the application of the mechanism to exchange-traded products ETPs , where we have a broader program underway to help ensure that these increasingly popular products operate robustly in a variety of market conditions.
We saw during the Flash Crash and on August 24 that ETPs can be disproportionately affected when markets become disorderly.
If the underlying market becomes disorderly, or if market makers and authorized participants step away from trading, the arbitrage mechanism can be disrupted and an ETP can trade at prices substantially away from its implied value. The Working Group is considering, among other things: Transparency, like robust technology controls, is central to strong and efficient markets.
And it is at the heart of their fairness. As the markets have changed over the last few decades, the informational needs of investors, other market participants, and regulators have changed as well.
We have therefore devoted considerable effort to addressing the evolving gaps in transparency created by dynamic markets, including those in the operation of trading venues and how brokers handle orders.
I have asked the exchanges and FINRA to do the same, and they have done so — from better describing how their order types work  to providing more information about data feed latency and usage. As I have remarked before,  while ATSs now attract very significant trading volume — today, more than 15 percent of the volume of NMS stocks — they still generally provide very little information to the public about their operations.
Last November, the Commission proposed new rules to require NMS stock ATSs to make detailed public disclosures about their operations and the activities of their operators and affiliates. An important complement to this initiative is greater transparency in off-exchange trading.
Another substantial transparency concern in the current market structure relates to the order routing practices of brokers, including the ability of large institutional customers to monitor those practices.
Indeed, broker-dealers today are required to disclose little about their institutional order routing practices. With the large number of exchanges and other venues that trade NMS stocks, all investors should know more about how their brokers negotiate this dispersed landscape. This summer, the Commission published a proposal to require broker-dealers to provide greater disclosure about their order routing practices, including individualized disclosures for each investor.
The transparency initiatives I have just outlined, as well as those undertaken by the exchanges and FINRA, address the availability of information to the public. As markets grow larger and more complex, regulators must also continue to have efficient access to the data we need for oversight — a principal goal of the consolidated audit trail, or CAT, which will enable regulators to accurately track securities activity throughout the U.
There is no higher market structure priority for me than to ensure Commission consideration of a final CAT plan before the end of the year. One of the major issues raised in comments has been the need for robust controls to protect sensitive personal information and proprietary data from cybersecurity threats.
I share this priority, especially given the breadth of data that will be collected by the CAT. The Commission is carefully assessing the security requirements of the CAT plan and evaluating comments on optimal approaches to address data security concerns. The Commission, of course, must ensure that it has strong measures in place to protect the sensitive, non-public information it handles, and I am strongly committed to implementing such measures in conducting our regulatory oversight responsibilities using CAT data.
In the first instance, we should be fully cognizant of the many different ways that algorithms and speed are used by market participants, including investors, and the consequences of the varying proposals intended to curb them, including blunt tools like market-wide fees or time limits.
As I emphasized in June , the Commission should not attempt to roll back the technology clock or prohibit algorithmic trading. Algorithmic trading is not a monolithic phenomenon, and interventions must be targeted to the specific market quality issues presented. Finally, and what I would like to briefly elaborate on today, the Commission should identify and address those specific elements of the algorithmic trading environment that may be working against investors, rather than for them.
When these fees and rebates are not passed through to customers, they raise concerns about, among other things, conflicts of interest between brokers and their customers, as well as the incentives they may provide high-speed traders.
The EMSAC devoted a great deal of effort to developing this recommendation, and I have asked the SEC staff to follow up with a recommendation for the Commission to consider in the very near term.
In June , I highlighted two additional initiatives relating to high-frequency trading. One is to clarify the status of unregistered active proprietary traders. The second is to address disruptive trading practices that could exacerbate price volatility in vulnerable market conditions. One of the challenges in developing these initiatives has been to obtain and analyze all of the data that is needed to fully understand the parameters of algorithmic trading and to fashion the optimal regulatory responses.
The SEC staff has sought to capitalize on the regulatory data that is currently available, obtaining and analyzing data from the exchanges and FINRA that includes the identity of market participants. The usefulness of this type of data analysis is demonstrated by the joint staff report on the Treasury market volatility of October Most of this volume, however, occurs in entities that are not registered as government securities dealers and that therefore are not subject to regulation as broker-dealers.
While similar data on the equity markets shows that most, but not all, high-volume principal trading firms are registered with the Commission as dealers, further certainty about the registration requirements is imperative as business models and market practices continue to evolve. The Commission has therefore issued a proposal, which I expect will be finalized in the near future, to ensure that all registered dealers are subject to FINRA oversight as well.
The Treasury market report is also instructive in assessing trading practices that can potentially work against the interests of investors and issuers. It observed that two types of short-term professional traders — principal trading firms and bank-dealers — accounted for nearly the entire imbalance in aggressive buy orders that led to a sudden spike in prices. The surge in aggressive demand by these professional traders appears to have increased, rather than reduced, their exposure to the market in the direction of the price moves.
Such trading is troubling because it suggests a destabilizing short-term trading strategy during a period of market weakness. The Commission staff has been conducting similar analyses of regulatory data on the equity markets to assess the nature of trading during volatile periods. And there are concerns about similar trading behavior among some high-frequency trading firms, raising similar stability concerns. One of the most difficult tasks in developing the right regulatory response to such potentially disruptive trading strategies is the need to avoid undue interference with practices that benefit investors and market efficiency.
To optimize our response, before the Commission settles on a proposal for an anti-disruptive trading rule, I have asked the SEC staff to assemble their work on disruptive trading practices for publication in the near future for the public to consider and comment on. Before closing, I would be remiss if I did not mention another guiding principle of market structure — one size does not fit all.
So far, I have been talking about how the Commission intervenes in market structure to constrain practices that can be harmful for investors and issuers. But building a quality market for smaller companies is a different beast — it requires innovating new business models and practices, and there the private sector must largely lead the charge. I am pleased that trading in the pilot program to test the effect of wider tick sizes is set to begin next month, and I will be very interested in the results.
I agree with many observers, however, that a change in tick size, even if it were to prove highly beneficial, is not likely to fully address the needs of smaller companies and their investors.
Each of the initiatives I have described today will make our markets stronger, better able to deliver real benefits for the investors and issuers they serve over the coming years.
The ultimate success of our market structure depends on the continued engagement of investors, issuers, the securities industry, and the wider public, as well as on the hard work of our fellow regulators. This engagement is central to our efforts today, as it will be for future Commissions.
The ambitious program of the last few years has drawn considerably from this ongoing dialogue. Our program is yielding positive immediate changes and — even more importantly — it provides a dynamic framework for continuing the comprehensive review of market structure that is essential to ensuring the U.
Global Exchange and Brokerage Conference, Jun. NYSE also amended its rules to reduce delays associated with pre-opening indications in volatile market conditions and to give its Designated Market Makers more flexibility to conduct automated openings during broad market volatility and to electronically re-open trading after a trading pause. NYSE Arca widened its opening and re-opening auction collars that limit the extent to which auctions can generate market clearing prices.
In addition, the National Securities Clearing Corporation now provides a post-trade monitoring tool that allows its members to monitor equity trading exposure across markets. FINRA has also amended its rules to require its member trading centers to do the same. Securities Exchange Release Nos. All of the exchanges have completed these reviews, and many have submitted rule filings to clarify the nature of some order types and how they interact with each other.
This timestamp was added last year, and clock synchronization was improved to help assure its usefulness. Academics and commentators already have begun using the information to analyze SIP latency, and this transparency should enhance the ability of the public to assess the extent to which SIP data meets their needs. To do so, investors now also have more information about how equity exchanges use data feeds, such as in matching and routing orders, which were added in response to my request in For more information about the CAT initiative, see http: IEX incorporates a microsecond delay in its trading system.
IEX began operating as an exchange as of September 2, , and intends to be fully trading with a protected quote no later than September 15, The Commission has directed the staff to conduct a study regarding the effects of intentional access delays on market quality, including price discovery and report back to the Commission with the results of any recommendations.
In addition, FINRA has published guidance on effective supervision and control practices for firms engaging in algorithmic trading strategies. Treasury Market on October 15, , available at https: As last August 24 demonstrated, preventing this arbitrage from functioning effectively would disrupt the functioning of many ETPs that investors in those products have come to rely on each day.