S. HRG. 111–922 EXAMINING THE EFFICIENCY, STABILITY, AND INTEGRITY OF THE U.S. CAPITAL MARKETS JOINT HEARING BEFORE THE SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT OF THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE AND THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION ON EXAMINING THE EFFICIENCY, STABILITY, AND INTEGRITY OF THE U.S. CAPITAL MARKETS DECEMBER 8, 2010 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.fdsys.gov/ U.S. GOVERNMENT PRINTING OFFICE 65–272 PDF WASHINGTON : 2011 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS CHRISTOPHER J. DODD, Connecticut, Chairman TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama JACK REED, Rhode Island ROBERT F. BENNETT, Utah CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky EVAN BAYH, Indiana MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee DANIEL K. AKAKA, Hawaii JIM DEMINT, South Carolina SHERROD BROWN, Ohio DAVID VITTER, Louisiana JON TESTER, Montana MIKE JOHANNS, Nebraska HERB KOHL, Wisconsin KAY BAILEY HUTCHISON, Texas MARK R. WARNER, Virginia JUDD GREGG, New Hampshire JEFF MERKLEY, Oregon MICHAEL F. BENNET, Colorado EDWARD SILVERMAN, Staff Director WILLIAM D. DUHNKE, Republican Staff Director DAWN RATLIFF, Chief Clerk WILLIAM FIELDS, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT JACK REED, Rhode Island, Chairman JIM BUNNING, Kentucky, Ranking Republican Member TIM JOHNSON, South Dakota JUDD GREGG, New Hampshire CHARLES E. SCHUMER, New York ROBERT F. BENNETT, Utah EVAN BAYH, Indiana MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee DANIEL K. AKAKA, Hawaii DAVID VITTER, Louisiana SHERROD BROWN, Ohio MIKE JOHANNS, Nebraska MARK R. WARNER, Virginia MICHAEL F. BENNET, Colorado CHRISTOPHER J. DODD, Connecticut KARA M. STEIN, Subcommittee Staff Director WILLIAM HENDERSON, Republican Subcommittee Staff Director PAUL SAULSKI, SEC Detailee DEAN SHAHINIAN, Senior Counsel LEVON BAGRAMIAN, Legislative Assistant (II) COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS JOSEPH I. LIEBERMAN, Connecticut, Chairman CARL LEVIN, Michigan SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware SCOTT P. BROWN, Massachusetts MARK L. PRYOR, Arkansas JOHN MCCAIN, Arizona MARY L. LANDRIEU, Louisiana GEORGE V. VOINOVICH, Ohio CLAIRE MCCASKILL, Missouri JOHN ENSIGN, Nevada JON TESTER, Montana LINDSEY GRAHAM, South Carolina CHRISTOPHER A. COONS, Delaware MARK KIRK, Illinois MICHAEL L. ALEXANDER, Staff Director BRANDON L. MILHORN, Minority Staff Director and Chief Counsel TRINA DRIESSNACK TYRER, Chief Clerk PATRICIA R. HOGAN, Publications Clerk and GPO Detailee PERMANENT SUBCOMMITTEE ON INVESTIGATIONS CARL LEVIN, Michigan, Chairman THOMAS R. CARPER, Delaware TOM COBURN, Oklahoma MARK L. PRYOR, Arkansas SUSAN M. COLLINS, Maine CLAIRE MCCASKILL, Missouri JOHN MCCAIN, Arizona JON TESTER, Montana JOHN ENSIGN, Nevada CHRISTOPHER A. COONS, Delaware ELISE J. BEAN, Staff Director and Chief Counsel CHRISTOPHER J. BARKLEY, Minority Staff Director DAVID H. KATZ, Counsel TY GELLASCH, Office of Senator Carl Levin MARY D. ROBERTSON, Chief Clerk ANTHONY COTTO, Counsel to the Minority (III) CONTENTS WEDNESDAY, DECEMBER 8, 2010 Page Opening statement of Chairman Reed ................................................................... 1 Opening statement of Chairman Levin ................................................................. 3 Prepared statement .......................................................................................... 52 WITNESSES Mary L. Schapiro, Chairman, Securities and Exchange Commission ................. 8 Prepared statement .......................................................................................... 78 Responses to written questions of: Chairman Reed .......................................................................................... 169 Chairman Levin ......................................................................................... 171 Senator Coburn ......................................................................................... 176 Gary Gensler, Chairman, Commodity Futures Trading Commission ................. 10 Prepared statement .......................................................................................... 84 James J. Angel, Associate Professor of Finance, McDonough School of Busi- ness, Georgetown University ............................................................................... 24 Prepared statement .......................................................................................... 87 Responses to written questions of: Chairman Reed .......................................................................................... 179 Thomas Peterffy, Chairman and Chief Executive Officer, Interactive Brokers Group .................................................................................................................... 26 Prepared statement .......................................................................................... 156 Responses to written questions of: Chairman Reed .......................................................................................... 187 Manoj Narang, Chief Executive Officer, Tradeworx, Inc. .................................... 27 Prepared statement .......................................................................................... 159 Kevin Cronin, Global Head of Equity Trading, Invesco Limited ......................... 29 Prepared statement .......................................................................................... 161 Steve Luparello, Vice Chairman, Financial Industry Regulatory Authority ...... 31 Prepared statement .......................................................................................... 164 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Letter Submitted by Timothy B. Henseler, Deputy Director, Securities and Exchange Commission ......................................................................................... 189 (IV) EXAMINING THE EFFICIENCY, STABILITY, AND INTEGRITY OF THE U.S. CAPITAL MAR- KETS WEDNESDAY, DECEMBER 8, 2010 U.S. SENATE, SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS, Washington, DC. The Subcommittees met at 3:30 p.m., in room SD–538, Dirksen Senate Office Building, Hon. Jack Reed, Chairman of the Sub- committee, presiding. OPENING STATEMENT OF CHAIRMAN JACK REED Chairman REED. Let me call the hearing to order, and I want to thank the Members of the Permanent Subcommittee on Investiga- tions, chaired by Senator Levin, for joining us in the joint hearing this afternoon. Both of our Subcommittees are extremely interested in understanding both the causes and implications of the May 6th Flash Crash, and in particular, we want to focus on how we can avoid and mitigate the effects of such events in the future. I am going to make an opening statement. I have been informed that Senator Bunning may be delayed and asked us to go ahead. Then I will turn it over to Chairman Levin who will recognize Sen- ator Coburn when he arrives. Also, under the rules of the Committee on Investigations, wit- nesses are sworn, and I will ask Chairman Levin to do the—after my opening statement, when the witnesses are introduced, to do the official swearing-in according to the rules of his Subcommittee. I certainly want to thank Chairman Schapiro and Chairman Gensler for being here, and all our other witnesses, and I want to commend both Chairman Schapiro and Chairman Gensler for the effort, the collaboration, the hard work they have done already to implement the Dodd-Frank bill. It was a spirit that has been no- ticed of cooperation and collaboration, which is a model for all of us. Thank you so much. I want to also apologize ahead of time for the schedule of the Senate. First we had to delay the hearing, and I thank the wit- nesses for understanding that. We also understand that a series of four votes will begin some time after 4 p.m. this afternoon. It is our (1) 2 hope that we can proceed, get the opening statements of at least our first panel, questions. Senator Levin and I have agreed to shut- tle back and forth so that we do not necessarily have to recess the hearing. So we will do our best to maintain the continuity of the hearing throughout the afternoon, but I apologize again for these four votes that are pending. Let me now focus on the substance of our hearing. Although the recently released report on the events of May 6th was quite thor- ough and thoughtful, the length of time it took to complete is an issue. What tools do our regulators need so that they can under- stand what is happening in our capital markets when it is hap- pening, or at least very shortly thereafter? That is, I think, one of the first issues. What resources do you need to effectively surveil and oversee capital markets, particularly markets that are evolving at such a tremendous rate given technology? In the