Go on Climbing
Good evening. It’s a pleasure to be here at the Stanford Director‘s College. As some of you may have experienced, it’s difficult to say“no”to my friend and former colleague, Joe Grandest.
Having served on boards, I know how challenging the role of director is. But I also know what an important job it is-perhaps more so today than ever. We have learned again and again over the last several years that active, informed and independent boards are often the difference between companies that successfully emerge from economic downturns, and those that are unableto do so.
Of course, I gave up my two corporate board seats when I accepted my current job, but I can sincerely say that board service is one of the things I miss most.
Fortunately, since I arrived at the SEC 17 months ago, there hasn‘t been much time to look back.
If you have ever done any hiking in the mountains, you’re probably familiar with the feeling you get when you‘ve struggled up the side of an impressive ridge and paused to enjoy your achievement...only to look around and discover that there is another hill ahead, another ascent to undertake. That’s how I feel nearly every day.
For the past year my colleagues at the Commission and I have been cresting a lot of ridges. Unfortunately, we haven‘t had much time to enjoy any one, single achievement as we would have liked, because there’s always been so much more to do.
Right now, the final touches on financial reform legislation are being made, and we‘re about to complete a truly historic ascent. This legislation will transform the terrain upon which much of the regulation of our country’s businesses and markets takes place.
While the SEC has been actively engaged in the legislative effort affecting the securities markets, we are already climbing the next hill, working to effect much-needed change outside of the legislative arena.
The experiences of the last decade have shown the importance of an effective securities markets regulator to our financial system and to our economy as a whole. I am extremely proud of the men and women who work at the SEC-agency veterans and newcomers alike-who are implementing one of the most significant investor-focused agendas in our history. This evening, I‘d like to talk about three key components of that agenda.
First, we’re adapting our regulatory approach to meet the challenges of the current structure of the financial markets;Second, we‘re protecting the interests of investors in transparent, secure markets;And third, we’re reconciling our rules to support the evolving dialogue between corporate boards, managers, and their shareholders concerning corporate governance.
Market Structure
Perhaps our steepest climb is ensuring that the structure of today‘s financial markets works for today’s investors and for companies seeking to raise capital-in short, ensuring that the markets are fair and efficient.
It‘s a task that we’ve been focused on for a great portion of my time as Chairman-and a task whose importance became even more apparent during the market disruption of May 6th. On that day, the Dow declined 573 points in five minutes-and then, moments later, recovered 543 points in just ninety seconds. For a brief period, the shares of some great American companies traded at absurdly low prices-some for as little as a penny-as prices lost all connection to intrinsic value.
We are focused on several working hypotheses and findings-such as a possible link between the sudden and severe price decline in index products on the one hand, and simultaneous and subsequent waves of selling in individual securities on the other.
We‘re also looking at significant imbalances between buyers and sellers that may have been exacerbated by the withdrawal of liquidity usually provided by a variety of market participants. Part of these investigations involve understanding the extent to which hedging, shorting, arbitrage, market orders, and limit orders contributed to selling pressure and liquiditymismatches.
And of course, all of the markets involved-equities, options, equity indices, and futures-are closely joined by a complex web of cross-market trading strategies, market participants, and even traders themselves. The result is that changes in prices within one market or venue often directly impact prices on another. Similar products trading in different forms, at different speeds, and under different market conventions, add further complexity and linkages.
We are already taking steps to minimize the chances of something like this happening again, however.
Within minutes of the May 6th disruptions, we were talking to exchanges and to market makers; within a couple of days we were meeting with exchanges and SROs to craft a response; and in less than two weeks we had posted for comment proposed rules that would halt trading for certain individual stocks if their price moved 10 percent in a five minute period.
Barely more than six weeks after the event, exchanges began putting in place a pilot uniform circuit breaker program for S&P 500 stocks-a program which will grow to include thousands of equities, helping to restore investor confidence and to ensure that markets can effectively carry out their critical price-discovery functions.
Advising us in this effort is a newly-formed Advisory Committee, comprised of two Nobel Prize winning economists, three former CFTC or SEC Chairmen and other distinguished experts?
The second step of our response has been to publish-this past week-proposed rules sought from the exchanges and designed to bring order and transparency to the process of breaking“clearly erroneous”trades. On May 6, nearly 20,000 trades were invalidated-but only for those stocks that traded 60% or more away from their price at 2:40 PM. That benchmark wasset after the fact; we will now have consistent rules in place before any future disruption occurs.
