Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues

 
 
Statement of
 
Christopher Nagy, Managing Director, Order Routing Strategy 

for the 

Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues 

August 11, 2010 

Chairman Schapiro, Chairman Gensler and Members of the Joint Advisory Committee, thank 
you for the opportunity to participate on this panel concerning the May 6
th
 market event.  I’m 
Chris Nagy, Managing Director of Order Routing Strategy for TD Ameritrade.   
TD Ameritrade, based in Omaha, Nebraska, was founded in 1975 and was one of the first firms 
to offer negotiated commissions to individual investors following the passage of the 1975 
Amendments.  Over the course of the next three decades, TD Ameritrade pioneered 
technological changes such as touch-tone trading and internet investing to make market access 
by individual investors more available, affordable and transparent.  While TD Ameritrade clients 
trade predominantly equities and options, we also offer clients the ability to trade futures and 
forex through our thinkorswim division.   
TD Ameritrade has long advocated for market structures that create transparency, promote 
competition and reduce trading costs for individual investors.  As technology rapidly advances, it 
is ever more important that the regulators complete the comprehensive review they are now 
undertaking to ensure the U.S. markets remain among the greatest in the world.   

   
It is our intent to present these comments on behalf of our 7 million client accounts, based upon 
the views that they regularly express to us and our experiences in providing services to them.   
While the U.S. financial markets have experienced precipitous market declines during a single 
day, including the most famous 1987 market crash when the Dow Jones Industrial Average 
dropped 508 points, the May 6
th
 market event in many ways was unique.  First, in the speed of 
the decline – the market whipsawed over 1000 points in just 10 minutes.  Second, the market 
decline was somewhat random and uneven, causing over 90% temporary declines in some stocks 
while others were relatively unchanged.  Third, and perhaps most importantly, it appears that the 
very nature of how the U.S. markets are structured was a contributing factor to the precipitous 
decline.  Although the causes may never be completely identified or understood, they appear to 
at least partially lie in the dispersed structure of the U.S. markets and the markets increasing 
dependence on liquidity providers who have no affirmative obligations to maintain two-sided 
markets.   
Regardless of the exact cause, it is clear that the May 6
th
 market event has had an impact on 
investor psychology, and their trust of the markets.  How do you explain to an investor that a 
company with a market capitalization of $26 billion that trades at $40 per share and seconds later 
trades at a stub quote of one penny?  Obviously, investors on the receiving end of executions 
filled against those stub quotes are going to question the fairness of the markets.  Similarly, 
misgivings were voiced by investors who had executions that were less than 60% away from the 
market.  Again, how do you explain to an investor that a trade 61% away from the market was 
deemed erroneous, but an order filled anywhere up to 59% away from market was not? 
2
 

 
From our perspective, the answers for these clients will lie in the actions we in the industry and 
the regulators now undertake.  Specifically, we may need to adjust the way in which the U.S. 
markets are currently structured so that investors can trust that the price displayed to them is 
valid; so that they have confidence in the liquidity available; and so that they do not believe the 
markets are somehow rigged against them.   
The May 6
th
 event was a wake up call, and one that requires a comprehensive response.  Today’s 
panel is a part of the appropriate response – it is a response that requires looking across the 
equities, options and futures markets and approaching regulation holistically.  It requires 
addressing not only the imposition of circuit breakers, but also must include a review of dark 
pools, flash orders, access fees, high frequency trading and naked access.  For investors, we think 
the right approach is a combination of the following: 
First, we agree with the adoption of the circuit breakers as a good first step.  The regulators 
correctly identified an issue and took quick action to ensure trading took a pause during extreme 
market movements.  But as everyone who has had to fumble around in the darkness of their 
basement searching to reset a circuit breaker knows, circuit breakers are a fail-safe and do little 
to address the underlying cause of the problem.   
Second, TD Ameritrade believes that the regulators need to find ways to incentivize market 
centers to stay in the market, maintain two-sided quotes, and most importantly, to post size 
regardless of the market environment.  The firm has noted previously that the May 6
th
 market 
3
 

event demonstrated that today’s markets contain many players who use their liquidity 
opportunistically – applying it when in their favor, but pulling it during times of market duress.   
Third, and particularly in the equities and options markets, the SEC should proceed with all due 
speed to move its Concept Release on Market Structure to a proposing stage, while at the same 
time addressing issues like co-location, access fees, flash and naked access.   
Finally, as to the specific allegation that retail market orders and stop orders contributed to the 
downturn, I can tell you from TD Ameritrade’s perspective, such orders are important to our 
clients, and looking at our own data, we do not believe there is any factual basis to assert that 
these types of orders contributed to the problem.  In fact, TD Ameritrade clients’ market and stop 
orders were within average daily volume, on a percentage basis.  Prohibiting market and stop 
orders would be a significantly adverse, misguided, and unnecessary over-reaction to the 
underlying causes of the May 6
th 
market event, which would unduly deny to retail investors the 
access to the markets that they enjoy today.   
I look forward to answering any questions you have, thank you. 
4
 

Statement of
 

Christopher Nagy, Managing Director, Order Routing Strategy 


for the 


Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues 

August 11, 2010 


Chairman Schapiro, Chairman Gensler and Members of the Joint Advisory Committee, thank 

you for the opportunity to participate on this panel concerning the May 6th market event.  I’m 

Chris Nagy, Managing Director of Order Routing Strategy for TD Ameritrade.   

TD Ameritrade, based in Omaha, Nebraska, was founded in 1975 and was one of the first firms 

to offer negotiated commissions to individual investors following the passage of the 1975 

Amendments.  Over the course of the next three decades, TD Ameritrade pioneered 

technological changes such as touch-tone trading and internet investing to make market access 

by individual investors more available, affordable and transparent.  While TD Ameritrade clients 

trade predominantly equities and options, we also offer clients the ability to trade futures and 

forex through our thinkorswim division.   

TD Ameritrade has long advocated for market structures that create transparency, promote 

competition and reduce trading costs for individual investors.  As technology rapidly advances, it 

is ever more important that the regulators complete the comprehensive review they are now 

undertaking to ensure the U.S. markets remain among the greatest in the world.   



   

It is our intent to present these comments on behalf of our 7 million client accounts, based upon 

the views that they regularly express to us and our experiences in providing services to them.   

While the U.S. financial markets have experienced precipitous market declines during a single 

day, including the most famous 1987 market crash when the Dow Jones Industrial Average 

dropped 508 points, the May 6th market event in many ways was unique.  First, in the speed of 

the decline – the market whipsawed over 1000 points in just 10 minutes.  Second, the market 

decline was somewhat random and uneven, causing over 90% temporary declines in some stocks 

while others were relatively unchanged. Third, and perhaps most importantly, it appears that the 

very nature of how the U.S. markets are structured was a contributing factor to the precipitous 

decline. Although the causes may never be completely identified or understood, they appear to 

at least partially lie in the dispersed structure of the U.S. markets and the markets increasing 

dependence on liquidity providers who have no affirmative obligations to maintain two-sided 

markets.   

Regardless of the exact cause, it is clear that the May 6th market event has had an impact on 

investor psychology, and their trust of the markets.  How do you explain to an investor that a 

company with a market capitalization of $26 billion that trades at $40 per share and seconds later 

trades at a stub quote of one penny?  Obviously, investors on the receiving end of executions 

filled against those stub quotes are going to question the fairness of the markets.  Similarly, 

misgivings were voiced by investors who had executions that were less than 60% away from the 

market.  Again, how do you explain to an investor that a trade 61% away from the market was 

deemed erroneous, but an order filled anywhere up to 59% away from market was not? 

2
 



 

From our perspective, the answers for these clients will lie in the actions we in the industry and 

the regulators now undertake. Specifically, we may need to adjust the way in which the U.S. 

markets are currently structured so that investors can trust that the price displayed to them is 

valid; so that they have confidence in the liquidity available; and so that they do not believe the 

markets are somehow rigged against them.   

The May 6th event was a wake up call, and one that requires a comprehensive response.  Today’s 

panel is a part of the appropriate response – it is a response that requires looking across the 

equities, options and futures markets and approaching regulation holistically.  It requires 

addressing not only the imposition of circuit breakers, but also must include a review of dark 

pools, flash orders, access fees, high frequency trading and naked access. For investors, we think 

the right approach is a combination of the following: 

First, we agree with the adoption of the circuit breakers as a good first step.  The regulators 

correctly identified an issue and took quick action to ensure trading took a pause during extreme 

market movements.  But as everyone who has had to fumble around in the darkness of their 

basement searching to reset a circuit breaker knows, circuit breakers are a fail-safe and do little 

to address the underlying cause of the problem.   

Second, TD Ameritrade believes that the regulators need to find ways to incentivize market 

centers to stay in the market, maintain two-sided quotes, and most importantly, to post size 

regardless of the market environment.  The firm has noted previously that the May 6th market 

3
 



event demonstrated that today’s markets contain many players who use their liquidity 

opportunistically – applying it when in their favor, but pulling it during times of market duress.   

Third, and particularly in the equities and options markets, the SEC should proceed with all due 

speed to move its Concept Release on Market Structure to a proposing stage, while at the same 

time addressing issues like co-location, access fees, flash and naked access.   

Finally, as to the specific allegation that retail market orders and stop orders contributed to the 

downturn, I can tell you from TD Ameritrade’s perspective, such orders are important to our 

clients, and looking at our own data, we do not believe there is any factual basis to assert that 

these types of orders contributed to the problem.  In fact, TD Ameritrade clients’ market and stop 

orders were within average daily volume, on a percentage basis.  Prohibiting market and stop 

orders would be a significantly adverse, misguided, and unnecessary over-reaction to the 

underlying causes of the May 6th market event, which would unduly deny to retail investors the 

access to the markets that they enjoy today.   

I look forward to answering any questions you have, thank you. 

4