The so-called “flash crash” on May 6 was not an aberration, U.S. Securities and Exchange Commission chairman Mary Schapiro said on Tuesday.

Speaking to the Economic Club of New York, Schapiro tackled the topic of market structure, and the sorts of reforms that the SEC is considering in that area.

She noted that some would argue that the flash crash was simply an aberration, and that now it has passed, markets don’t need any reform. “I disagree. I believe that important questions remain that deserve our attention,” she said.

Indeed, Schapiro observed that many retail investors appear to have fled the markets since that event. The commission has heard this from both investors and retail brokers, she noted. And, according to mutual fund data, every week since May 6 has seen an outflow of funds from equity mutual funds, she said.

“I recognize that there may be a variety of reasons for reduced participation in the equity markets, but the trend is troubling, particularly if concerns about equity market structure are playing even a small role in investor decision-making,” she said.

Schapiro stressed that the SEC has taken a number of actions in response to the flash crash, but she said that more needs to be done. “Given the stakes and the seriousness of the concerns, we must look closely and comprehensively at the full range of issues, identify if and where the market structure is not fulfilling its mission, and take appropriate steps so that it does,” she said.

Schapiro said that regulators should reexamine the circuit breaker mechanisms, including the circuit breakers it recently adopted for single stocks in response to the crash, to see if they can be improved, and how they should be calibrated.

“Even if all circuit breakers are set with appropriate parameters, however, they should be considered fail safe mechanisms — we must also consider steps to promote ongoing reliable price discovery so that circuit breakers are very rarely needed,” she added.

Another area that needs review is high frequency trading, she said, including “whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways in tough times.” And, whether this should extend to HFT firms, too.

The SEC and other regulators are also looking carefully at order cancellation practices by some firms, she said, noting that some HFT firms routinely cancel 90% of their orders. And, she suggested regulators are considering whether steps such as registration and trading requirements are needed “to ensure that these and other practices are used only in ways that foster — not undermine — fair and orderly markets.”

Finally, Schapiro said there are market fragmentation issues, including the increasing use of dark pools. “Given the public markets unique role in price discovery, we must be careful that the short-term advantages to individual traders from non-transparent trading does not undermine all investors in the long run by compromising the essential price discovery function of the public markets,” she said.

Schapiro concluded that regulators should not attempt to turn the clock back to the days of trading crowds on exchange floors. “But we must carefully consider whether our market structure rules have kept pace with the new trading realities,” she said. And, if not, what can be one to eliminate the flaws.

IE