TESTIMONYOF CHRISCONCANNON EXECUTIVEVICEPRESIDENT VIRTUFINANCIAL,LLC BEFORETHEUNITEDSTATES SENATECOMMITTEEONBANKING,HOUSING,ANDURBANAFFAIRS SUBCOMMITTEEONSECURITIES,INSURANCE,ANDINVESTMENT HEARINGON COMPUTERIZEDTRADING:WHATSHOULDTHERULESOFTHEROADBE?

SEPTEMBER20,2012

ChairmanReed,RankingMemberCrapo,andmembersoftheSubcommittee,Iwantto thankyoufortheopportunitytoappearbeforeyoutoday.MynameisChrisConcannonandI amanExecutiveVicePresidentforVirtuFinancial,LLC. VirtuFinancial(VirtuortheCompany)isaglobalelectronicmarketmaker.Virtuis anactivemarketmakeronmorethan100marketsaroundtheglobe.Virtumakesmarkets fromoursixofficesinNewYork,LosAngeles,London,Dublin,SydneyandSingapore.The Companysmarketmakingactivityspansacrossmultipleassetclasses,includingcashequities, fixedincome,currencies,futures,options,energyproducts,metalsandothercommodities. Virtu,throughitssubsidiaries,isdirectlyregisteredasabrokerdealerorinvestmentfirmand operatesasaregisteredmarketmakeronmostprimarymarketsaroundtheglobe.IntheUS, Virtuoperatestworegisteredbrokerdealersthatarealsoregisteredasmarketmakersor designatedmarketmakersontheNYSE,Nasdaq,BATSExchange,NYSEArcaandNYSEMKT.In Europe,Virtuoperatesaregisteredinvestmentfirmthatisalsoregisteredasamarketmaker ontheLondonStockExchange,theSwissExchange,EuronextandtheDeutscheBourse Exchange.Obviously,Virtubelievesinthebenefitsofmarketmakingandiscommittedto providingcontinuous,obligatedliquidityinthemarketsweserve. IndiscussingthestateoftheUSequitymarket,Istartfromthepremisethatourequity marketisthemostdynamicandefficientmarketintheworld.TheUSequitymarketisaspecial assetthatshouldbecelebrated.Ourmarketsareenviedbynationsandfinancialcenters
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aroundtheglobe.OurUSequitymarketisalsothemostliquidandrobustpricingmechanism ontheplanet.Myfirmtradesacrossallofthemajorfinancialmarketsandnomarketcan comparetotheUSequitymarketintermsofpricingefficiencyandliquidity.Companieslisted onourUSmarketsenjoythemostefficientandliquidmarketwhichcontributestohigher returnsfortheirinvestors.Overthelastfouryears,Ihavewitnessedanunprecedented numberofclaimsthatourmarketsarehorriblybroken,unfairanddangerous.Theseclaims tendtobeshortonfactsandevidence,butlongonpresscoverageandbookdeals.Ourmarket isnotperfect.Andithasrecentlyexperiencedsomedramaticmishaps.But,despiteitsflaws,it isamarketthathaswithstoodthemostunprecedentedvolatilityandrepricingofequityvalues inourlifetimewhilemaintainingthesamelevelsofpricingefficiency. Letmebeclear,ourmarketisnotperfect.Ithasflawsandunnecessarycomplexity. TheUSequitymarketisoverlyfragmentedand,likely,overengineered.StocksintheUStrade electronicallyon13nationalsecuritiesexchangesandover40darkpools.Thecurrentstateof ourequitymarketisnotonethatwewouldsetouttodesignifwediditalloveragain.TheUS equitymarketsbeganevolvingintoafullyelectronicmarketduringthe1990s.Forthelast decade,ourmarketshavebeenlargelyautomated.Thatmeanseveryexchangeandevery marketintheUSisafullyautomated,electronicdestination.Virtuallyeveryorderarrivesatits intendedexchangeinelectronicform.Theautomationthatexistsinourmarkettodayisnota newphenomenon.Technologyhasbeenoperatingourmarketsforthelastfifteenyears.
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Withfragmentationandtechnologycomescomplexity.Ourmarketisoneofthemost

complexsecuritiesmarketsontheplanet.Itisnotnaturallycomplex.Itiscomplexbecauseof thenumberofmajorregulatoryreengineeringeventsthathavetakenplaceintheUSoverthe lastfifteenyears.Forexample,thelistofmajormarketstructurerulechangesincludesthe LimitOrderDisplayRule,RegulationATS,Decimalization,T+3SettlementCycle,Regulation NMS,RegulationSHO,SingleStockCircuitBreakersand,morerecently,theMarketAccessRule. Eachofthesemajorregulatoryreengineeringeventsrequiredsubstantialtechnological enhancementstobedeliveredbyallindustryparticipantsandexchanges.Thesewerenot simplesoftwareprogrammingendeavors.Thesewereallmajortechnologyprojectscompleted acrosstheindustry. IwouldliketofocusonthreeareasthatIbelievedeservefurtherreview:(1)ourchoice

ofasinglemarketstructureforalllistedcompanies;(2)ourmarketsfailuretoenhancemarket makerobligations;and(3)theindustryscurrentriskmanagementstandards. First,ourmarketiscurrentlydesignedasaOneSizeFitsAllmarket.WhatImeanby thisisthatmostofourmajormarketstructurerulesdonotdistinguishbetweenthesizeor marketcapitalizationofthelistedcompany,orthetradingcharacteristicofitsstock.Our marketsaredesignedtoexecuteallstocks,regardlessofshapeorsize,usingthesamemarket mechanism.Asthelistofpubliccompaniescontinuestogrow,amorediversenumberofpublic companiestradeonourmarketwhilesubjecttothesamemarketstructure.Astockthattrades

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onceperdayistradedinthesamemarketstructureasastockthattradesonemilliontimesper day.OurmarketissolelydesignedforCisco,MicrosoftandBankofAmericaandnotforastock thattradesbyappointment.Ibelieveweshouldrevisitourcurrentmarketstructureinorderto createabetterpricingmechanismforallstocksofdifferentshapesandsizes.ThisOneSize FitsAllapproachisfurtherexacerbatedbyanexpansionoftheportfoliosofourlargest investors.Asinstitutionalholdingsexpandfurtherintolessliquidstocks,likeRussell2000 stocks,ourlargestinstitutionsarestrugglingtotradeinourpoorlydesignedmarketstructure forthosetypesofstocks. Mysecondareaoffocusisonourmarketsfailuretoenhancemarketmaking obligations.Whilemyfirmisamarketmakeranditiseasierformetocallforenhancedmarket makingobligations,Ifundamentallybelievethatweneedtoincreaseobligatedliquidityinour markets.Flashcrashes,miniflashcrashesandothermarketdisruptionsdemonstratetheneed foradditionalobligatedliquidityinourmarket.However,Ibelieveenhancedmarketmaker obligationsshouldbetargetedwheretheyaremostneededandthatisinourlessliquidstocks. Andso,myearlierpointaboutourflawed,singlemarketstructureshouldbeconsideredwith enhancedmarketmakingobligationsasacomponentofanewmarketmodel.Newmarket modelsforlessliquidstocksshouldbeaccompaniedwithenhancedmarketmakerobligations Myfinalareaoffocusistheindustryscurrentriskmanagementstandards.Inlightof

recentevents,Ibelievethattheindustryshouldexplorewaystoimproveriskmanagement
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standards.Industryparticipantshavealreadyidentifiedseveralareasofriskmanagement enhancementsthatshouldbeimplementedandcouldbedeliveredinshortorder.First,pre traderiskmanagementlimitsarealreadyrequiredbytheSecuritiesandExchangeCommission (SEC)underSECRule15c35(alsoknownastheMarketAccessRule).UndertheMarket AccessRule,whichhasbeenineffectforoverayear,firmsarerequiredtoestablishpretrade creditlimitsforeverycustomeraccountandforthefirmsownproprietaryaccount.Thecredit limitsrequiredbytheMarketAccessRulemustbeadministeredinrealtimeandatalltimes. Thesecreditlimitsareafirmsprimarydefenseagainstunwantedtradingactivitybythefirmor byitsclient. Inaddition,theindustryiscurrentlyexploringspecializedKillswitchesthatwouldbe administeredbyexchanges.TheseKillswitches,ascurrentlybeingdiscussed,wouldprovide asystematicshutoffofafirmifitexceededprescribedorpresettradinglimits.Killswitches wouldnotbeaprimarydefense,butrather,asecondarydefensetobackstopthefailureof otherriskmanagementmeasuresoperatedbyafirm.Killswitcheshaveoperatedeffectivelyon futuresexchangesintheUSformanyyears.Thesesametradinglimitscouldbeimplemented acrossallUSequityexchanges.Likethefuturesexchangelimits,firmswouldberequiredto establishlimitsoneachequityexchange.Suchakillswitchwouldhaveseverelylimitedthe damagedoneonAugust1stofthisyear.

Thelastcomponenttoenhancedriskmanagementisoneofthemostimportant.We believeasimplefeaturereferredtointheindustryasdropcopiesshouldberequiredasa mandatoryriskmanagementtool.Dropcopiesareseparateanddistinctconnectionsoffered byexchangesandothermarkets.Dropcopies,whicharewidelyusedbytheindustry,providea realtimeecho,orcopy,ofafirmstradingactivityonagivenexchange.Dropcopiesare primarilyusedbytheindustrytorunreconciliationsthatcompareafirmsknowntrading activityagainstwhattheexchangebelieveswastradedbythefirm.Thisiscommonlyreferred toasaStreetvs.Housecomparison.Ifsuchadropcopycomparisonisconductedinrealtime bysystemsthatareindependentfromthefirmstradingsystem,afirmwillalwayshavean accurateassessmentofitspositionsandtradingactivity,includingbothintendedand unintendedactivity(SeeExhibitI). WhileIbelievefirmsshouldhavearobustprocessfordevelopingandtestingnew

software,theindustrymusthaveadvancedriskmanagementsystemstolimittheriskof unintendedtradingactivitybyafirmoritsclient.Weknowwithcertaintythatsoftwarehas bugs,hardwarecrashesandnetworksgodownnomattertherobustnessofafirms developmentandinfrastructureprocess.Theindustrymustbuildriskprotectionsthatassume theworstwhilearobustdevelopmentandtestingprocessavoidstheworst.Pretraderisk checks,Killswitchesandrealtimedropcopiesprotectusfromtheworstevents.

Thankyouagainfortheopportunitytobeheretodaytospeakonthissubject.Iwouldbe pleasedtoanswertheCommitteesquestions.