The SEC as Financial Stability Regulator

Abstract

It is well established that the Securities and Exchange Commission (“SEC”) has a mandate to protect investors and to encourage capital formation, but this Article argues that the SEC also has another mandate – to promote financial stability. Importantly, this does not mean that the SEC needs to abandon its traditional identity, or adopt the regulatory tools and methods deployed by prudential regulators like the Federal Reserve. Instead, this Article argues that the SEC is best suited to promoting the stability of the financial system from a market, rather than a prudential, perspective.

To make this Article’s discussion of “SEC as financial stability regulator” more concrete, it looks in detail at the SEC’s approach to high frequency trading – a practice that is fundamentally changing the structure of the equity markets that the SEC oversees. In particular, this Article analyzes all of the testimony, public statements and speeches by SEC commissioners and senior staff members on the subject of high frequency trading that were published between January 2010 and January 2017. From a close reading of these communications, this Article establishes that during this period, financial stability was indeed a motivating concern of many SEC Commissioners and staff members as they explored regulatory reform of high frequency trading, and equity market structure reform more generally. This Article therefore concludes by exploring what a financial stability-minded approach to regulating high frequency trading would look like (and the types of resources the SEC would need to discharge such a task).