Self-Regulation in the Financial Markets: Exchange SROs


Self-Regulation in the Financial Markets: Exchange Issues, Market Structure, and Investor Protections (Part 2) by David Merkel, CFA

Exchange SROs: Meeting the Needs of Investors and the Financial Marketplace


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  • How do exchange SROs contribute to the effective functioning of the securities markets?
  • How has the role of exchanges changed since they were first designated as SROs, and have these changes affected their ability to function effectively in that role?
  • Do recent breakdowns in exchange oversight functions indicate a need for an overhaul of structure/functions or point to “fatal flaws” in the current system?
  • Are conflicts in the current system of demutualized exchanges resolvable or inherent in the system?
  • What needs to be done to reinforce the integrity of the system and increase investor protections?
  • How does increased competition from broker/dealer internalization networks and foreign trading markets affect exchanges under the constraints of the current self-regulatory system?


Roberta Karmel
Centennial Professor of Law, Brooklyn Law School
Former Commissioner of the US Securities and Exchange Commission

The change from fixed commissions was significant.  NASD traders had preferential rates trading with one another.  Existing SROs continued on.  Expulsion was a threat.  Exchange listing standards were a significant protection.

Many markets, and profit seeking exchanges have changed matters.  Sarbox and Dodd-Frank have affected matters  with listing requirements.  JOBS act has opened up listing standards, and perhaps not in a good way.  SEC was happy to see the monopoly of the NYSE broken, but there have been unanticipated secondary effects.  We need to ask what kind of regulation we need now in the present environment.

Richard G. Ketchum
Chairman and CEO, Financial Industry Regulatory Authority

Mentions MS was the first Chair of FINRA.  Merger of NASD and NYSE Reg.  FINRA has an enhanced majority of public governors.  No way for industry to capture FINRA.  Oversees all bond and equity trading.  Exchange SROs can delegate to FINRA, but they must oversee what FINRA does for them.

Mary Schapiro
Vice Chairman of the Advisory Board, Promontory Financial Group
Former Chairman of the US Securities and Exchange Commission
Former CEO of the Financial Industry Regulatory Authority (FINRA)
Former Chairman of the Commodity Futures Trading Commission

SROs are cost-effective and flexible, with deep expertise.  Examine participants, Surveill markets, etc.  New tech, markets, exchanges as profit-seeking entities are new challenges.  Conflicts of interest have grown along with HFT.

Moderated by: Andrew N. Vollmer, University of Virginia School of Law

Q: Does the current system work well? What areas do we need to change?

MS: It’s working well.  Vigilence is needed.  Well-functioning SROs are an aid to regulators.  Easier for an SRO to address an issue with stakeholders.

RK: Wants the SEC to have a bigger budget, merge the CFTC into the SEC.  SROs are necessary now because the system won’t work without them.  Fragmentation of trading makes self-regulation less effective.

ANV asks RGK to reply.

RGK says FINRA aids regulators.  FINRA brings knowledge, focus and access.  Government regulators are more confrontational, FINRA can get more done.  Exchanges are the only ones enforcing listing standards.

MS concurs that listing standards are needed.

Q: Have we lost some of the benefits of SROs with the delegation of authority to FINRA?

RGK: has worked with SROs his whole life.  Comments how things were often worse in the past, not all things are worse today.

MS: Concurs with RGK.

RK: There has been loss, much of it through the destruction of exchange-based trading.  2008 meltdown — few firms did anything to stop the crisis.  Everyone acted in their own interest.

Q: Aside from listing standards, what other things should the exchange SROs do?

MS: Exchanges will always be responsible for aspects of investor protection.

RK: Exchanges will always have an interest in the integrity of their markets.

RGK: Comments that exchanges should watch over the quality of products traded [DM: think of leveraged and inverse ETFs, ETNs, penny stocks, promoted stocks, etc.]

Q: What about efficiency at the SRO level?

MS: Competition and efficiency don’t always work well together.  SEC and CFTC should be merged.

RK: SEC and CFTC should be merged.  Need more than one regulator, though.  Did not work in the UK.  FSOC a disaster, a non-solution.

RGK: We interact with everyone.  No opinion on whether the SEC and CFTC should be merged.

Source: Pixabay

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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