Although post-crisis regulatory changes have likely increased the costs of market making, markets were already undergoing dramatic changes well before the crisis. High-frequency and algorithmic trading firms already accounted for a large and growing share of transactions in the interdealer market, altering the speed and nature of market making. As traditional dealers have lost market share, they have sought to remain competitive by internalizing a greater share of their customer trades, finding matches between their own customers and keeping those trades off the public interdealer markets. But internalization does not eliminate the need for a public market, which is where price discovery mainly occurs. Dealers need to place the orders that they cannot internalize onto that market, and at times of market stress such as on October 15, they will likely need to put most of their orders onto the public market.

As the Commission is well aware, there have been a number of high profile events in recent years that arose due to insufficient operational controls at trading firms and trading venues. Some of these have even caused market disruptions. While we recognize we do not live in an ideal world and there will never be a 100 percent error free trading environment, we do believe there is a need to develop quality standards related to the development, testing and deployment of ATSs and their components. Furthermore, many industries rely on standards setting bodies like the IEEE Standards Association and ANSI (American National Standards Institute) under ISO (International Organization for Standardization) to facilitate standards development yet there is no such corollary for the development of ATSs within a HFT environment. Therefore, we believe that market participants and the Commissions Technical Advisory Committee (TAC) should work together to formulate standards or guidelines for HFT that will help mitigate the impact of operational risks. We also note that many industry and regulatory groups have devised best practices for HFT. Nevertheless, many firms do not fully implement these best practices because they are not required to do so. We believe it would be beneficial for the Commission to work with the industry to define best practices for HFT and to communicate penalties for non-compliance with those best practices. We also believe disseminating information related to best practices could potentially reduce costs within the industry as firms learn through information sharing to avoid mistakes their peers have encountered. Finally, we believe the Commission should periodically engage with the industry to review and revise these best practices, as industry participants are generally the first to observe disruptive market events and to understand rapidly evolving technology.