As exchanges are coming under more and more pressure from alternative execution venues and trade volumes decline, regulators are keeping a watchful eye.

During a speech at this year’s Security Traders Association (STA) annual conference, Erik Sirri, Director, Division of Market Regulation at the Securities and Exchange Commission, discussed the future of traditional exchanges and what the role of the regulators could be in the exchange evolution.

While regulators are keeping a close eye, Sirri maintained that any changes would be made for the overall market wellbeing. “We’re not trying to pick winners or losers or one business model over another,” said Sirri. “But we are taking a look at market quality and will take steps to improve it if need be.”

He also pointed out that in order for exchanges to be competitive they want to mimic what non-exchanges are able to do, but are constrained by regulations and time consuming processes such as rule changes and filings.

As a result they are not able to be as nimble as ATSs, ECNs or dark pools to change and adapt quickly to keep up. “Exchanges are saddled with legacy technologies,” said Sirri, adding that they have also traditionally been held back in some ways by their member organization structure.

But he said that the regulators are evolving to keep up with the changes and help exchanges remain competitive. “Regulators have to be more empirical and analytical as we deal with these issues,” said Sirri. “Exchanges are not just a set of rules anymore, they are pieces of complex software,” said Sirri.

As for what exchanges will want for the future, Sirri said a change in the role market maker or specialist could be on the horizon. “The balance could be tilted,” said Sirri. He added that the traditional obligations of a market maker or specialist could be a question for the regulators.

He also sees the use of hidden or contingent orders as picking up steam on the exchanges in response to the growing acceptance of dark pools. “We could see greater use of those order types on the exchanges going forward,” said Sirri.

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