that were particularly important to is this a bit. -- important to elizabeth. a blessed be the god and father of our lord jesus christ. who consoles of us in our affliction. so that we may be able to come sold those who are in any of flexion with the consolation with which we are consoled by god. so also our consolation is abundant through christ. the second passage comes from -- as for me, i am being fought out as a libation. i have fought the good fight,

finished the race, and i have kept the faith. from now on, the crown of righteousness which of the lord will give me on that day, and not only to me, but also to all that have long before his appearing. these special passages of holy scripture, along with her affirmation of faith in christ, tells me that her struggle with face was over. she had made her decision. she knew in whom she believed and was persuaded that his words were true. i do to prepare a place for you, that where i am he would be also. over the 40 years in my active ministry, i have known many individuals who believed in god but felt they could not understand much about that

supreme being. that being as far as they viewed it was too big for them to comprehend. as a minister of the gospel, i say to do today with great joy that this christmas season speaks to that concern. in the first chapter of the gospel of john, he proclaims the word became flesh and dwelt among us. the word jesus became flesh and dwelt among us. that man of nazareth. in a passage from the gospel in which i read earlier, jesus said whoever has seen me has seen the father. jesus came to show us what god is like. he certainly came to save us from san bought also came to show us how to live life fully and abundantly. he demonstrated that love and peace and justice and

forgiveness every day of his life. i feel compelled to say parenthetically it must bring the lord great sadness to see people promoting hate in his name. jesus was far more interested in redemption and then in condemnation. let me say that again. jesus was far more interested in redemption then in condemnation. most of us know the passage, and john 3: 16. whoever believes in him should not perish and should have everlasting life. sometimes we forget to read that 17th first. god sent not his son in the world to condemn the world, but the world and through him might be saved. pre-christmas him says holy child of bethlehem this and to

us. we pray, cast out our sins and be born in us today. at the end of that him -- the end of that him says abide with us, our lord, emanu-el. jesus was called emanu-el. the bible tells us that name means god with us. we are not alone. you are not alone. there is a wonderful old story in which i would like to close with, about a family that woke up one christmas morning and prepared to attend a worship service at the little chapel. the father made his usual excuses for not going, and then sent his family on their way. after they had left, he went into the den and looked out through a large fixture window upon a beautifully snow-covered

landscape. as he admired the beauty of nature, his attention was drawn to a little flock of tiny birds fluttering in the snow. it seemed to him they were very cold and hungry, and he felt sorry for them. he put on his boots, coat, hat and glove, and he made his way out to the barn where he flung open the doors and scattered the grain in the entrance. he walked some distance away from the barn, which in for the birds to fly in, but they did not breed they were afraid it. the mantra to slip behind around them and shoot them into the barn. that did not work and they flew in every direction. food with frustration, he took off his hat and slapped it against his leg. you don't bird's book critic liu understand i am trying to help you? in a moment of clarity, he

thought of course they don't understand. i am so much bigger and stronger than they are. they are afraid of me. then he thought if only i could become a bird, i could tell them i am trying to help them. at that moment, the chimes from the little village chapel built out a glorious hymn. elizabeth edwards excepted that message, that good muse, and now she has claimed the promise of heaven. friends, i wish i was wise enough to tell you what heaven is like, but i do not know. i know jesus said today you will be with me in heaven -- in paradise. my guess is paradise for elizabeth certainly involves a

glorious reunion with her beloved son wade. and so, to you, john, cate, and other family members and friends, find solace and comfort in the promise that your dear one is in god almighty's care. she fought the good fight. she has finished her course. thanks be to god for the life of elizabeth edwards, and thanks be to god for her example of courage, openness, and dignity. in the name of the father, the son, and the holy spirit. amen. i want to offer a word before we prayed together. this family has endured much sorrow and turmoil and lost over these days. they need to grieve and heal and to console each other.

they need and deserve some privacy. i am sure there are many friends joining me in asking for that book critic granting out of a sense of christian charity. do it out of a sense of common decency. i believe, and then maybe foolish or naive, but i believe that trade still reside in our national character. let this be one of our better moments. leave these folks alone. let them have some peace and time. the following prayer comes from william henn. let us pray. oh, dear lord, we give back to you those whom you gave to us, especially in this day we

remember elizabeth who you have graciously received into your presence. you did not lose her when you gave her to us. we do not lose her by her return to you. your dear son has taught us that life is eternal and that love cannot die, so death is only a horizon, and a horizon is only the limit of our site. opened our eyes so that we may see more clearly and that we may know we are near to our loved ones. you are preparing a place for us. prepare us for that happy place, so that where you are, we may be always. amen. let us pray at the prayer that the lord has taught us pray that our father, who art in heaven. if i can come, thy will be

done, give us this day our daily bread and forgive us our trespasses as we forgive those who trespass against us, and lead us not into temptation, but deliver us from evil, for the line is the kingdom and the power and the glory forever. amen. one of the hymns that elizabeth's elected is the one that we are going to sing, 707. ♪ ♪

♪

♪ >> please be seated. on the back of your public and it is a wonderful prayer that will serve as our benediction. a want to ask you to remain seated as we pray together and continue to remain seated as the family departs. you will be directed went to

stand and when to leave by the ushers. let us pray. lord, support us all the daylong until the shadows bless and and the evening,, and the busy world is hushed and the fever of light is over, and our work is done. then grant us safe lodging and a holy rest and peace at the last. amen. [bell chimes] ♪ [bells chime] ♪

♪ [organ plays "joy to the world"] ♪

♪ >> there will be another chance to see the memorial service tonight at 9:00 p.m. eastern or on our website, c-span.org. in london, students rioted over higher tuitions and residents worry about program cuts. this month, two programs each weekend with interviews in from london. tonight --

and a sunday -- this weekend at 8:00 on c-span. >> just in time for the holiday season, "the supreme court, " is being offered directly to our viewers at a very special price. it is just $5 plus shipping and handling, a discount of 75% off of the original price. 10 original c-span interviews with current and retired supreme court justices, including chief justice roberts, stephen brier, sandra day o'connor. it gives readers a compelling view of the modern court with 16 pages of photographs, detailing the architecture and history of landmark buildings. to order copies at this special

price of $5, go to c- span.org/books. place your order by december 15 to receive your copy in time for holiday gift-giving. >> madeleine albright spoke about her tenure as secretary of state at this forum. she also discussed wikileaks and iran's nuclear program. she is being introduced by the widow of president anwar sadat. >> this is the first lecture to be hosted by our new university president and by dr. john

thompson, the dean of the college of behavioral and social sciences. allow me to briefly introduce them. i have strict instructions not to -- that emit a least one of the largest colleges at the university of maryland. prior to becoming dean in july 2009 he was a chair of the department of geography, which he led to become an international leader in global measurements through advanced satellite imaging technology. let me also say since the theme of this lecture is international peace, dean townshend has been a strong advocate of enhancing international programs in the college and in the university. even in these difficult and

challenging financial times, he has committed resources to the politics department to hire five professors this year. in fact, we met this morning to make our recommendations after reviewing more than 200 applications from around the world and interviewing 16 candidates. it is really my great pleasure to introduce to you my game, dean john townsend. -- - dean, deemed the john townsend. [applause] >> a kiss me great pleasure -- it gives me great pleasure to be here. this chair honors the memory of president anwar sadat with a

commitment to outstanding scholarship and public outrage. he initiated this lecture for peace, which has engaged leading figures to share their insights on peace issues around the globe. it is my pleasure to introduce our new president, dr. wallace lowe who will tell you more about the lecture. dr. lowe is an outstanding educator and leader. we are delighted that he is with us this afternoon to preside over his third lecture for peace. [applause] >> good afternoon, everyone. thank you very much.

it gives me great pleasure to welcome you to the ninth anwar sadat lecture for peace. this lecture series was created in the name of the great nobel prize laureate anwar sadat, a man of extraordinary stature. as president of egypt, he exhibited extraordinary courage. he was described by president jimmy carter and by then secretary of state henry kissinger as the greatest leader they each had known. president sadat was a victim of the hatred that he sought to vanquish.

his dream has not died. thanks to the vision and support of his widow, dr. sadat, the university has the opportunity through this special series to pay tribute to this great man by promoting his ideals. the sadat lecture of peace is one of the highlights of our academic year. we are all indebted to those that make it possible, to dr. sadat, the professor for their dialogue in the middle east, and for dean townsend. we gather today to hear a lecture on peace at a time when peace is elusive, and the specter of war has spread to many corners of our globe.

everywhere, people yearn for peace, and they look for leadership. guided by the example of such great men as anwar sadat, we persevere in tha tnoble quest. we are deeply honored that secretary madeleine albright has graciously agreed to deliver this year's anwar sadat lecture for peace. i am very pleased today to take this opportunity to pay tribute to the person whose vision has stimulated this wonderful lecturer series, a very special friend, dr. sadat. she is an internationally known advocate for peace.

we are extraordinarily fortunate to have her as a member of the faculty at the university of maryland, serving as a senior fellow at the center for international development and concert management. her vision and support has helped expand the role of the university in promoting the dialogue of peace and conflict resolution. dr. sadat lives a life of public service that is an inspiration to us all. she has made life better for the people of egypt. as first lady of egypt, she worked to improve women's rights and to bring medical care to handicapped and veterans and children. she established sweeping programs to eradicate illiteracy.

she has been a forceful advocate for children and for family services. following the death of her husband in 1981, she carried anwar sadat's banner. whenever opportunity exists to foster a dialogue, to promote understanding, and to build a better future for the people of the middle east, dr. sadat has played a role. her goal is to "sothis seeds of hearts."min anddsds and she has been recognized for many honors and awards. i am very proud to present my colleague, dr. sadat, who will

introduce our keynote speaker. [applause] >> thank you, mr. president. secretary madeleine albright, president, dean thompson, ladies and gentlemen, it is my pleasure and honor to be here today to introduce the lecture for peace and this year's extraordinary lecturers. we hold this lecture for peace as we near the end of 2010. with peace in the middle east still elusive. just last week, we commemorated the 63rd anniversary of the 1947

united nations plan to petition palestine into two states, and yet the conflict continues, and the solution remains just an idea. many israelis have fought multiple wars since with untold suffering of innocent people on both sides. when my late husband anwar sadat broke through the cage of pain and hopelessness, by visiting jerusalem and declaring no more wars, he was speaking for millions for peace and justice. yet, despite much progress since then, and the end of war between egypt and israel, the comprehensive peace has yet to be reached. at the core of such peace and

elusive circumstances between israel and palestinians. to his credit, president barack obama understood from his first day in office how important it is real-palestinian conflict is but also to the united states into the world. yet, despite active diplomatic efforts, as those of us who have fought for peace for much of our lives are seeing the continuation of conflict, occupation, and hopelessness. many in the region are losing faith in the possibility of peace. we need new thinking, new energy, new perspectives. we need an end to conflicts. no one is better able to provide

such perspectives then our distinguished lecturer for this year, the honorable madeleine albright. she needs no introduction, as she is a role model for many men and women around the world. she has inspired millions with her fashion for justice, human rights, and democracy. she has been at the forefront for education for women's rights, a subject very dear to my heart. born in czechoslovakia to a family deeply involved in international diplomacy, she became a u.s. citizen and pursued an academic career, becoming an accomplished professor. dr. madeleine albright was appointed by president clinton

as the representative for the united nations. she instantly became a major force at the u.n. because of her expertise in world politics as well as her leadership skills. secretary of state from 1996 to 2001, and as the first woman to ever hold the position, dr. madeleine albright worked tirelessly to advance peace and democracy around the globe. she strengthened america's relationship with rest of the world, campaign for human rights, promoted international peace, and advocated for improved environment standards abroad. she saw the successful campaign to reverse ethnic cleansing in kosovo while promoting peace and

propagating democracy in europe, asia, and latin america. she has reduced nuclear dangers with relations with russia and has developed in much-needed relationship with china, not only with trade, but with human- rights. she worked diligently to advance peace in the middle east. when dr. madeleine albright left the government in 2001, she has made contributions to the international society. she is the author of four best sellers for the the new york times. she founded the madeleine albright group, llc, a global strategy firm where she

champions developing countries increasing investments in their economies. she is chairman of the national democratic institute for chair ofonal of, there'saffair, a global economic project, and chair of the presidential scholarship foundation. she teaches the practice of diplomacy at georgetown university's school of public service. dr. madeleine albright serves on the board for the council on foreign relations and the aspen institute and the center for renewed american security. threw out her careers, secretary madeleine albright has always stood up for what is right. a scholar, a teacher, a state woman, a public servant, and a tireless activist for a just

world. it is my great pleasure to introduce to use the 2010 anwar sadat lecturer for peace, a woman that i greatly admire, the honorable madeleine albright. [applause] >> thank you very much for telling everybody who i am because not everybody always knows. i was coming back from china and not long ago, and china -- and chicago was the first port of entry. i was getting dressed for the security people and put my stuff down on the conveyor belt. the lady behind me asked me where i got many of my bottles.

the tsa guard looked at me and said oh my god is you. he was from bosnia. can i have my picture taken with you? we had a picture taken and it held up the whole line. i went back to get my stuff. the lady said what exactly happened here? i said i used to be secretary of state bureaucrats she said, "of bosnia?" [laughter] so i appreciate you clearing all that up. thank you very much for your lovely introduction. dr. lowe, congratulations on your new position. and my very good friend, shibley, who has been a stalwart

adviser for a long time. thank you all very much, and good afternoon. before i begin officially, i would like to express sadness due to the recent fires in northern israel. i understand your family lives there. so a great tragedy. i know president obama and secretary clinton have expressed their condolences on behalf of the american people. i really am very pleased to be here today, and is great to have this honor and be invited to deliver this year's anwar sadat lecture. i realize just how unique this event is. i realize as well that almost everything worth saying about the middle east has already been said, which does not bode really well for the next 30 minutes, so

perhaps we should speak about art. this is the only series i know that is accompanied by a competition on the drawing and sculpture. this is appropriate because there are many ways and then the media in which to express our yearning, emotions, and ideas, so i want to pay homage to the very talented winners for the anwar sadat art peace competition. i thank them for their efforts. every time i look at the prize- winning work, i will be provided that even in the midst of enormous complexity, there is still hope for peace and intercultural understanding. a second source of that hope is the fact that i do teach at george washington university, and it must be written somewhere that all will be well when swords are transformed into plowshares.

in that spirit, i want o congratulate dr. lowe and the entire university of maryland family for your good fortune in having a great teams and such a wise professor and accomplished scholar. i am convinced that many of the world's problems would be solved if we shut our mouths for a few hours and listened to this man and then acted accordingly. unfortunately, one problem with the middle east is that people tend not to listen very well. i remember a decade ago when i was at camp david with negotiators from both sides. if i were to ask any of you to spend time at camp david, i think you would probably say yes. after two weeks in the rain with the israelis and palestinians, i don't care if i ever go back. [laughter] i wanted to beat my head against a wall.

no one got up before noon. anyone that started talking and never stopped. which is why today more than ever we need leaders in the middle east who will take a fresh approach, leaders who will back their words with action, and possess the daring, wisdom, and boldness of anwar sadat. it so happens i had the honor of working in the white house during the jimmy carter administration. those of you who are students might think of it as about halfway between the invention of the wireless hand-held blackberry and the discovery of fire. [laughter] those who are older refer it to the 1970's. the world seemed simpler than. president sadat got america's attention when he kicked the bad guys out of egypt and said he

was open to the ideas of the west. he got the world attention when he decided the right place for him to articulate the arab position on the middle east was also the most unlikely. odyssey was among the most striking acts of international political courage in the entire 20th century. it was undertaken in the cause of peace, reconciliation not with just a regional rival, but with a bitter enemy. unlike so many other politicians, he did not put his finger in the air to determine which way the wind was blowing. he put his life on the line in order to change the wind's direction. while others were content to argue about history, he was determined to shape it, and he did. in partnership with the prime minister and with a healthy nudge from president carter, he showed that peace was possible

between israel and the leader of the arab world. the middle east remains a dangerous place, but consider how much more perilous it would be and how much more tragic recent decades were the been if egypt and israel remained at war. the 1979 peace agreement created a foundation upon which future initiatives would be based, and they included the 1991 comprehensive regional peace talk launched in madrid, the 1993 oslo process highlighted by the famous white house handshake between prime minister and the chairman, and in 1994 the landmark peace agreement signed by the leaders of israel and jordan. these events give us hope in the early 1990's, that momentum towards peace might prove unstoppable. this was, after all, the age of a miracle and wonder where a broad coalition rolled back

iraq's invasion of kuwait. when central europe regained its freedom, and when superpower summits were replaced by meetings. it seemed the right time for its seeds of peace in the middle east to take root, but then in november 1995, another terrible blow fell. and assassination rob the world of another great leader, who was not afraid to take risks for peace. middle east diplomacy soon began their after. the clinton administration hoped to reinvigorate the peace process, which had stalled after this assassination and the subsequent allegations of bad faith. we wanted to get the train back on track before it was too late. so i went to the region to promote three basic principles.

the first was a mutual commitment to security against violence, and is required is serious effort on the part of the palestinians to prevent acts of terror. the second was an agreement to settle differences at the bargaining table and not by other means. this meant an end to what we called on helpful unilateral -- unhelpful unilateral acts. this meant embracing the core breakthrough of the oslo process, which was the two sides should view each other not as enemies but as partners. in other words, our goal was similar to the one that president anwar sadat brought to the middle east 20 years earlier to change the direction of the wind. looking back, i am proud of the

effort that we made, and i give credit to the negotiating team to make the effort to achieve a breakthrough. i will not forget president clinton with his sleeves rolled up and a yellow pad in his hand, exploring every possible avenue for agreement. nor do i forget the afternoon in which we invited jordan's king to speak to negotiators who at that time had reached an impasse in their bargaining. the king was respected by the arabs because he was a direct descendant of the profit mohammed and because he once waged war against israel. he was respected by the israelis because he had opposed terror and later made peace, and he was also dying of cancer. the king had come from the peace talks directly from the mayo clinic. his color now was terrible.

chemotherapy robbed him of his hair, his beard, and his eyebrows. when he began to speak, the entire room fell silent. he spoke of forgiveness, strength but also of compassion, the urgent issues of the day but also of the judgment of history. his work reminded me of an event that it taken place a few months just before that. a gunman had gone berserk and killed seven israeli school girls. unlike many others in the middle east, the king had not made excuses. instead, he had gone himself to israel and knelt down in the homes of the victims, sharing the sorrows of the families and apologizing on behalf of his nation. you might say it was merely a gesture, but that gesture contained in it the only possible solution in the middle

east, which is a recognition of the value and dignity of every human being, whether arab, muslim, or jew. as we all know, the clinton administration's drive to achieve peace far short. some critics said the president had tried to hard. i don't think it was possible to have tried to hard. the last decade began in violence and ended in paralysis. the bush administration's so- called road map to peace was never really taken out of the glove compartment. instead, we saw an era of political turbulence that divided both the israeli and palestinian communities. there were splits within splits. the reservoir of trust vanished and doubts hardened into despair. many concluded there was no longer any hope, that they could

never live together on last one side is crushed or the other pushed into the sea. i will tell you this afternoon, i do not believe that. nor should we accept it. to seize at the sword instead of an olive branch is a choice. to glorify murderers as martyrs is a choice. to dehumanize and disrespect the dignity of others is a choice. these are all choices. when people have the capacity to choose, they have the ability to change. we cannot make choices for those who live in the middle east, but we can try to help both sides put together a new foundation for peace. the good news is many of the materials for building such a foundation here are close at hand. first and foremost, the current

generation of leaders in israel, the palestinian authority, and the united states are all once again committed to the goal of reconciliation. this is basic but has not always been the case in recent years. second, there is broad international support for peace. european leaders have been especially vocal in encouraging peace builders on both sides of the israeli-palestinian divide it. arab leaders, too, especially in egypt have shown a renewed interest in a creative diplomacy. third, a important steps are under way to strengthen the economic underpinnings of the peace process. these include the aspen institute's middle east investment initiative, which is providing credits for more than 200 business enterprises in the west bank and gaza. with sufficient support -- excuse me. these numbers will rise dramatically in coming years,

multiplying job opportunities in sectors ranging from construction to farming. in the interest of full disclosure, i should tell you i am on the board of the middle east investment initiative and chair of the project called partners for a new beginning. this effort is intended to build on president obama's 2009 speech, in which he called for stronger ties between the united states and people in the muslim- majority states. the partnership was designed to enhance cooperation in four key areas -- economic opportunity, scientific advancement, educational access, and intercultural understanding. the program was different from past initiatives because it is not a one-sided program. instead, it emphasizes cooperation among the united states government, the private- sector and civil society here at

home, and two of the middle east and indonesia. the reaction of some to president obama's speech last year was that the words were nice, but where is the meat? partners for a new beginning will help to answer that question. a fourth reason to be hopeful about the prospects for middle east peace is that the outlines of a potential agreement is no mystery, although it does constitute quite a mouthful. at the language now being used by the state department refers to a deal that would "reconcile the palestinian goal of an independent and a viable state based on the 1967 lines with agreed swaps and a jewish state with a secure and recognized borders that reflect subsequent development and meet security requirements it." you may be certain that every eloquent words of that formula has been carefully chosen.

the phrasing is designed to provide as much guidance as possible without crossing and the bodiesred line. it is not surprising that the language leaves open the means by which competing goals will actually be reconciled. among the questions that the negotiators will have to wrestle with all the following. what exactly would constitute a viable palestinian state? how hard will that be to agree on adjustments of the territorial lines that were in place prior to the 1967 war? can the two sides come to terms on the jurisdiction over holy places? can a workable compromise be found on the right of return for palestinian refugees? how does the palestinian desire for full is statehood a smash with israel's concerned about border security? how can israel be sure that in independent palestine will not

be used as a staging ground for missile attacks? finally, when all of these issues are resolved, what about the fact that the gaza strip is governed by hamas, which is neither welcomed nor interested in seating at the peace table? at this point, i should confess that one of the reasons why i love being a professor is that i can often get away with asking questions instead of answering them. many of you students might have experienced this in your own classrooms. my excuse for using it now is the answers must come from the party, which means that we may have to wait a little bit longer. in saying that, i am being realistic but that does not mean i and a pessimist. i concede a few additional reasons why the timing for a peace settlement is favorable. for example, the current palestinian leadership on the west bank is more professional

and capable than any of its predecessors. it is possible to look at the president and prime minister and his team and see the basis for a viable, responsible, and independent state. timing matters as well, because the principal threat to security today does not come from the palestinians but from iran. unlike the radicals in tehran, the government has accepted israel's right to exist, and demonstrated a commitment to negotiation, and it's taken a stand against a violent extremism. intelligence and military officials acknowledge the importance of this. israel's deputy prime minister is a close ally and said it recently "there has been no terror in the past year and a half, and the palestinian economy is experiencing unprecedented growth so there is

a relatively comfortable feeling, but it is an illusion to think that the situation to remain as it is. this is not a normal situation. israel has an interest in creating a border. the obvious danger is if a peace deal cannot be worked out, the moderate leadership on the west bank could well resign or be forcibly displaced. this might mean an immediate end to cooperation and the new beginning of a new cycle of tension and violence. one reason that negotiations in the middle east are complicated is that they are not conducted with just the people who live in the region. a decision about the status of jerusalem is of concern of jews, muslims, and christians across the globe, so a negotiator feels countless millions of lives

scrutinizing every move. many diplomats would like to ignore the religious dimensions of the middle east debate, but that is neither possible nor wise. removing the obstacles of peace in the middle east is not just a question of zoning. there are those on every side who believe that conflict over the holy land has been foretold and will lead to the end of days, but armageddon is not a foreign policy and the same scriptures that used to rationalize hate can be employed a far more convincingly to justify compromise and mutual respect. after all, the best response to bad theology is better theology, and the tradition demands that believers respond favorably to those inclined towards peace. over the years, i have talked to officials on both sides of the

israeli-palestinian it divide. few were willing to be honest with their own people about what an achievable agreement would entail. it was much easier to issue declarations about will never be surrendered, causing crowds to cheer but making compromise even more difficult. a successful peace maker must know intimately the needs and desires of those whose behalf she or he negotiates. this is the simple part pretty he or she must know what is necessary for the other side. "what i do for a living -- i get up in the morning, drink a cup of coffee, sit down at my desk, and then start to ask myself, what if i were him? what if i were her? how would i react?

" perhaps it is easier for an author then it is for a national leader to ask these questions, but if such considerations are not taken seriously, the future of the middle east will never the past but with ever more powerful weapons. i have said many times that there is a resemblance between world affairs and the chain reactions of a game of billiards. what happened yesterday affects today, and what happens today affects tomorrow. if one were brave enough to talk about the history of the middle east to an audience with all relevant ethnic backgrounds and faiths, you would likely find it that every perceived transgressions perceived cause earlier back in time, which is why focusing on the past while instructed is never enough. our leaders have responsibility to look ahead and make the best of current opportunities on the table.

together, they must awaken a sense of common purpose so that peace becomes not a fantasy or an empty rhetorical device, but it broadly shared and finally obtainable goal. i am not suggesting that leaders and act out of altruism alone or gamboge foolishly on the goodwill of others, but the best in others cannot be found unless it is first searched for, and cannot be sustained unless it is recognized and nurtured when it appears. a policy based on frustration, hatred, or fear will lead nowhere except to more of the same breed more of this and was not acceptable to anwar sadat. it should not be acceptable to us. thank you all very much.

[applause] >> thank you so much, dr. madeleine albright. she has generously agreed to take some questions from the audience, so if you have a question, we have microphones in both aisles. we will take the questions as they come. as the lines are forming, allow me to ask you a question. >> do i have to take back everything i said about you? >> as you know, we do a lot of polling in the middle east at the university of maryland. we are releasing three new polls, and two of them are from

the middle east. one thing that is clear is that the vast majority of americans support a mediation role in the middle east peace process, but most importantly a large number of americans, almost 40%, see this as one of the top three tough issues for the united states of america. president obama, when he came to office, he defined middle east peace as an important american national interest. at the same time, we have this formulation, which is we cannot wanted more than the parties themselves want it. why is why can't we? isn't that a contradiction. if it is in the vital interest of america, why can't we want

it more? is there a problem in our position? >> i actually do not think so. in the end, there is no way to impose a peace or plan. i think there are ways to put ideas on the table and put -- do more in terms of breaching activities, but ultimately -- bridging activities, but ultimately whatever it is that comes out of it has to be implemented by the people in the region. so, we can not, from our distance, decide that this is the way that it should be his the people on the ground do not think so. what is interesting -- i taught class this morning, and the last assignment for my students was to put down what priorities were for the next year. mostly, people thought it was nuclear non-proliferation, but a large number of them did think that middle east peace, or lack of, was the key to a series of other issues that were not resolved. so, in my billiard ball analogy, i think that peace in the middle east is one of those horizontal a dynamic events that would have a defect in other -- horizontaly dynamic events that would have effect in others.

i do not think that we can say that -- the people on the ground have to want it, or it will never happen. >> thank you very much. we will start with the right, and then we will go to the left. please, go ahead, and if i may, i will take two questions at a time. so, please go ahead. >> secretary albright, you mentioned the effect of iran in noting the students talked about non-proliferation. how does the united states, then, address the sort of inextricable link between iran and their nuclear ambitions in the broader arab-israeli conflict? >> we will take one from the left as well. >> you talked a little bit about how you think barack obama is going about this, but my question is what exactly is he doing to pursue peace in the middle east? we have seen him talk and talk, and more speeches, and that is not really accomplishing anything. what sort of things has he done to forward that, and what do you think is being accomplished, because it seems like president benjamin netanyahu is all alone in this, and i do not think we are

showing support to the israelis and other nations there to forward peace, less salt than we did in the last eight years. -- less so, than we did in the last eight years. if you could point to what you think is actually being done. >> first of all, i think that this is the right day to be talking about what is being done about iran and the nuclear threats. they came out this morning saying they now have this yellowcake which gives them more independence in terms of creating their own nuclear power, whether a weapon, where just nuclear energy -- or just nuclear energy. talks have begun in geneva. they had a session this morning. the question is, what will be next? what the united states and the p-five-plus-one, , which are the permanent members of the security council plus germany, that are talking with iran with

the idea to persuade them that they need to come clean on what they have the on the nuclear energy, and they need to allow the inspectors to come in. it is a combination, we believe, and by the way when i say we, just i, because i do not represent the administration in any shape or form, in fact one of the best things about no longer being secretary of state is that i can actually answer your questions. [laughter] >> the bottom line is -- the belief is that the sanctions are in fact working, which is why the iranians have been willing to come to geneva. they will not admit that they are working, but there clearly are pressures on the economy, and some chance of moving. there is no question that the israelis, for good reason, regard iran as an existential threat. so, president obama and other leaders, as is normal, have said that they do not take any option off of the table, but that they want to see whether they can do this combination of pushing with very tough sanctions,

resolutions, and then at least holding out the possibility of engagement through talks. on your question, i think that it is very important to understand the choreography of negotiations. what happens is that there are first of all -- the will to do something about this has been stated over and over again by president obama, but you do not normally put a president into the middle of negotiations and so there have been a lot of other efforts made at lower levels. so, former senator george mitchell is in the region all of the time, goes back and forth. secretary clinton has had, i do not know how many meetings, trying to figure out how to make this work. she says she just spent seven hours with prime minister benjamin netanyahu in new york. having done that myself, i know how hard that is. he is not alone. i think on the contrary.

i think that he has a great deal of support in israel and in the united states. i think that the way it is set up, at least it was when we were in office, was that dennis ross was a negotiator, i would go in and meet at a variety of times, and then president clinton would get in gauged at various phases where we thought we could move the process -- get engage, at various phases where we thought we could move the process forward. that is what i think is going on, which as president obama has said the course, made clear what he wants in a two-state solution, security for israel, and that the negotiators are trying to move some of the underbrush, and try to sort out and put ideas on the table, and that this is a priority for the united states. at least that is my view of it.

>> we will take two of more again, from the right, and from the left. >> secretary albright, regarding the high tensions on the korean peninsula, and since one of you are the few people in modern times to actually go to north korea, do you think that any form of armed conflict is inevitable between the two koreas? >> ok. >> hi. i am an undergraduate student here. my question has more to do with current events right now. i was wondering what your reaction was to the wikileaks situation right now, if you thought it was a positive or a negative, and if you were secretary right now, secretary of state, what would you do, what would the necessary steps be to do now? >> on north korea, i have to say that i went to north korea in the fall of late 2000. i am still a lot highest level sitting american official to go to north korea and meet president kim jong il. president clinton and president carter were there in order to get hostages out, but there were no longer in office. what i think that is most

unfortunate is that we left the talks at the end of 2000, and out of office in 2001, that they did not pick up from where we had left them. i believe we were moving in a positive direction in terms of having made clear to the north koreans set the united states had no hostile intent. they were willing -- they had a missile, and they were willing to stalky exports on a variety of nuclear technology. -- stopped exports on a variety of nuclear technology. the bush administration, for its own reasons, chose not to follow up with that. there was a hiatus, and then ultimately moving to the six- party talks, parts of which look like they might be successful, then the north koreans back out of various parts. i think what is the nervous- making about this is that we are not very knowledgeable about what is going on in north korea. there is speculation that all

this shelling and various acts of force are due to the fact that there is a succession process beginning, and that kim jong il wants to know and his 27-year-old -- anoint his 27- year-old son. some of you here are 27, salt i think that it is hard to imagine what it is hard -- so, i think, that it is hard to imagine what it is like running a dictatorship that age. -- at that age. so, there could be miscalculations. i actually do not think -- i think people are very much aware of the dangers of war, but there could be a miscalculation because there has been shooting and, and the south koreans say they are going to have a variety of exercises, and sometimes accidents happen. i think that we have to be -- i, personally, do not see a war

coming out of this, but i do worry that we do not have a lot of leverage here, that the chinese, who are supposed to be the ones with the greatest influence, are not pushing as hard as one would hope on the north koreans. secretary clinton to come up who is meeting today with the south koreans and the japanese, and what is happening is i think a tightening of the relationships are around an american center, an alliance in southeast asia. there is more of a dedication of doing things together. for me, it is the miscalculation that is a bit more of the problem. wikileaks -- what i love, it is my professors said this reminded him of something that happened in vienna in the 19th century where the people said this is a catastrophe, but it is not serious. [laughter] >> it is definitely a very bad problem, and i know secretary

clinton has been traveling around saying "i am so sorry, i am so sorry," because part of what happens is the job of a diplomat is to be the eyes and ears of the country he or she is representing abroad, and try to find out what is happening. this material comes in, and a lot of it is just the data which then ultimately is assessed by other people, then policy comes out of that. it is not necessarily policy. a lot of people have said if you are talking to the person behind you, or the person standing here, you might not want to know that you do not like his red tie. i think that the issue is what, in fact, interest in personal relationships that go on?

it is a problem. it is also generally a problem that we do not quite know how to deal with the information revolution in so many ways, or we do not know what to do about cyber attacks. this is, in some ways, the beginning of a potential way that people get inside each other's information systems, and then use them for bad causes. i just finished help on doing the building blocks for a new nato's strategic concept. we were at a group of experts that pointed out that cyber terrorism, cyber attacks, were going to be the biggest problem, and how do you handle them. this has not had the label of a cyber attacks, but if you think about what is going on, it is a way to get inside information systems and do damage, and from what i understand this person has decided that if he is

arrested he is going to release a bunch of other stuff. i never liked it. i really never like it when one person decides that he or she has a right to on do an entire system. what makes this person think he is doing the right thing? i do not think it is the right thing, and i also think there is a voyeuristic aspect to it, so it is fun to read, but it is damaging. >> we will take two more. >> i am fine. >> what you think of the role of the intelligence community in solving these problems? >> the intelligence community? >> cia? >> did you want to take another one? >> sure. let's take another one. >> dr. albright, you have said some of the most difficult some of the most difficult people, i guess i was wondering

the techniques you use to deal with these people, especially as a woman with a very difficult leaders? >> first of all, let me say that i teach a course at a university, another place, in which i say foreign policy is just trying to get some country to do what you want. that is all it is. so, what other tools? my course is called the national security toolbox. you looking into the tool box, and the truth is there are not a lot of tools in there. there is diplomacy, bilateral, and multi-lateral, the economic tools, the carrots, the trade and aid, and the sticks, which are embargoes and sanctions, and the threat of the use of force, intelligence, and law enforcement. that is it. the question is how you mix and match them. intelligence is a very important part of it. an example that i used is one president bush decided that pre-emption was a part of

american doctrine, i thought about it this way, which is somebody were there, if you were there, and had a gun, and pulled the on me, and i had a gun, and i could shoot back, it would be self-defense. his somebody came to me and said there is someone downstairs with a box and he has an uzi in it, so let's go get him, and somebody gets him, and it has a saxophone in it, you have committed murder. that is where intelligence is the achilles heel of that particular doctrine, but also shows the importance of knowing that you need to know more about your enemy. you need to know about the internal structures in a variety of ways in a country. that is the analytical part of intelligence.

and then, obviously, and i literally just had this discussion with my students. everyone thinks covert activity as the sexiest thing of all, but the bottom line is it does not happen that often. ask you cannot have a covert activity that does not match the stated position in the united states. intelligence is an important. intelligence is a product, and the decision maker is the consumer. every intelligence that i ever read would say this might happen -- it is a lot of different scenarios. the question is what the decision maker brings to it, and sees different things. so, it is very important. on your question, i think that -- i was just reading something. when i leave here, i have to go

and do a historical interview on cosell. i was reading what it was like to talk to milosevich. here, i knew that this person was responsible for the death, passing the cleansing, or removal of hundreds of thousands of people, and the issue was to go talk to him about something. he was on a term he thought -- offensive. i thought he was so disgusting thinking that he could charm and me. he was calm, and oil of -- oil the up. basically, my father was the ambassador to yugoslavia. i happen to know a little bit about the history. i said i know the history, we do not have to do this, let's talk about what is happening now. i also had another trick, saying

i have come a long way, so i must be frank, and i would really let them have that. the problem was the following -- i had turned down the idea there would be a press conference, because who wanted to stand next to him and tried to make nice? he ambushed may, and brought cameras in. if anyone has my book, there is a picture of me. one of the hard parts for an american, especially, is to shake hands with somebody, and not smile. it is an automatic reaction. i have this game face on, but the bottom line is you need to talk to people you do not like, and the question is how long you have some kind of decent human conversation, and how after that you get to the point, because you are there defending your

country's national interest. if you do not get the point out, it does not get made. as a woman, it is easier to start the charming part, then they are off of their game, and then you let them have it. [laughter] [applause] >> thank you. >> take two more? >> good afternoon. i am a graduate student. thank you for coming. general petraeus at georgetown last year was asked what does winning look like him of war on terror terror i wanted to ask you the same question. his answer was when we are not being attacked anymore. how do we reach that point? what is your vision of victory, and do you think we will reach said in our lifetimes? -- reached that in our

lifetimes third >> i am a senior here. you were saying about the jordanian prime minister that he kneeled down in front of the families -- the daughters that were killed. i recently read an article about a reuters journalist that was fired upon by an apache helicopter in on iraq, and civilians were killed, little children were killed, and in the helicopter they said "great job, nice work," and had no remorse for killing civilians. i am curious how you feel about building support in iraq, and how we are doing that, just try to build support one we are doing things like this? >> ok. well, first of all, these questions actually go together

in an interesting way. i think it is very difficult to try to figure out how to feel safe and secure in a situation where the enemy is using a variety of tactics that are very different from what a normal military has to deal with. i think we have, in some ways, changed what people are looking for as the final time. not that afghanistan will ever be a jeffersonian democracy. that is so ridiculous. i hate that term. the issue is basically a way that al qaeda has been dismantled and destroyed, and does not point a -- pose a threat to us, and the additional sense that the taliban not be in charge of the country. what will be a when double

moment ishen the afghans are running their own lives. the problem is, and i have no answer for this, is what is happening as al qaeda is being defeated in afghanistan, it is moving to yemen or somalia. the question is how we, you, this generation, lives with this movable threat, and the extent to which we allow the fear factor to dominate our lives. i think we will have to live with this unfortunately, and try to figure out what the cause is, which will take much longer. off to a great extent, we know that situations in countries, whether it be the gap between the rich and the poor, or dislike of some previous action here is what leads to this. there has to be more work done to try to figure route the basis

of it, which is one of the reasons i hate the term "said islamic terrorism." yes, we need to figure out why some of this is linked to those who believe in islam, and one of the reasons i like partners for a new beginning his trying to figure out how we could have a different relationship with various parts of moslem majority countries to deal with these problems internally, and but there is not going to be a surrender ceremony or whatever. it is a very different kind of thing. on your question, i honestly, except for a few bad apples, find it that americans do not like to kill civilians. it is not part of what the rules of engagement are. it is a very difficult

situation. when i was in office, there were accidents that happened, and we heard that some convoy was blown up. everyone was distraught. it does not happen on purpose, and the americans and nato apologizes. i hate the term collateral damage. these are human beings. if there are serious issues in terms of civilians being used as shields, sometimes. we were criticized, not that i am offensive or anything, but basically, when our embassies were hit in kenya and tanzania, president clinton decided to launch cruise missiles against osama bin laden's can be in afghanistan. i was the lead witness on the 9/11 commission, and there were those that said why did you not hid them much harder at that

point, and part of it was that we did not have intelligence. wheezed could see that he was supposed to be in some place, but then there were women and children in that place, so we did not hit it. i honestly do not believe that nato or american forces have instructions to hit civilians, and what happens, it is accidental and i apologize. >> will sit it couple of mortared >> we will take the last two. >> in your latest book, you talked about the cannes, and the stories behind them. -- pins and the stories behind them. >> at the university, we are a community of resources. how, as students and as faculty members, how can we utilize resources to be able to

essentially helps the world in the future, or even currently as students or faculty members? >> i will answer the questions in reverse. i think part of it is that when i -- i love being in university settings because there are times when people feel free to ask questions, not just of professors, but of each other. university communities are very diverse. i will literally talk about my own class. i just had a group of graduate students with students from malaysia, pakistan, colombia, spain, along with american students, and we had had a capability -- and around, and asking each other different questions, exploring, trying to get history straight, not in terms of the baggage we all bring with our own understanding. the other part, i think, is

activism. i believe that it is very important for students to go out and really be involved, if you are international in terms of going abroad and spending time on exchange programs, and working within the various either non-governmental organizations or businesses abroad. i think the part that is really important is to see yourself as operating in a different world. this weekend, there was an article written that was not stop logical -- that was the stocks it about the cold war. there were the bad guys, and the good guys. people did not go to war because ethnic conflicts were frozen. i think he's looking backwards is useless. what has to happen is you need to use capabilities to be able to go out there and really

explore the possibilities. the other part that is so interesting, that i think you will find, is that you will need your fellow students later in life, and i believe in networking. you will have established a relationship with people who will end up in important jobs in their countries or states, or whatever, and having that experience works together very well. on the pins -- they would never have happened if it had not been for some of same. i was ambassador at the united nations. it was after the gulf war. i was and instructed ambassador, and the cease-fire had been translated into six security council resolutions that have to keep being renewed. my instructions were to say

perfectly terrible things about said, who sang constantly, which he deserved -- sadam hussein, which he deserves, and an article appeared comparing me to many things, including a serpent. i wore a snake and. i think you have seen pictures of the ambassadors as they come out after a security council meeting. all of the sudden, a camera asks why you are wearing a snake and paris i thought this was fun. i've got a bunch of -- snake pin. i went out and bought custom jewelry, depending on what i thought we were going to do. on good days, i were butterflies, and flowers, and on

bad days, insects, and horrible animals. the other ambassadors would say what are we going to do today, and i would say read my pins. it was after president bush had said read my lips, no new taxes. i sent him a copy of the books, and he said the law of the title. today, i thought it was appropriate to where two dogs. that is why i am wearing these. -- of this. that is why i am wearing these. thank you all, very much. [laughter] [applause] thank you. [applause] [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] >> thank you so much for joining us, for honoring us, for your

and likening words. as a small gesture from our side, a token of appreciation, i would like to present use some heart. i want to tell you all about this art. we have a competition that is sponsored by our art department amount of art students. every year, we have competition for the best painting and the best sculpture on the team of peace. when i am presenting to secretary albright's today are two pieces that won the 2009 competition i am not a point to carry it. and do not worry. the first one is the piece of art that you see on our right. it is one of our students who was now a graduate student in arizona. it is called interaction. it is a magnificent piece. i would like to present that to you.

could you please applaud the student for her fabulous work? [applause] >> this one, i can carry. it is called unity. it is by samuel more, and i believe he is here. could you please stand up, so we can applaud you? [applause] >> as you can see, it is a magnificent work of bronze. it is a bit heavy, but not too heavy. we would like to give your best to keep. thank you so much on behalf of the university of maryland, the president, the dean, and mrs. s adat. you have honored us with your presence and your words get see why so much for coming karen thank you, you ought -- see why

so much for coming. see why, you all. so much for coming. thank you, you all. [applause] >> coming up on c-span, a senate hearing on the stability of capital markets and computerized trading, then federal trade commission chairman john leibowitz, and poland and the president talks about relationships with russia and the united states. -- :'s president talks about relationships with russia -- poland's president talks about relationships with russia and the united states. tomorrow, a "washington journal, tim fernholz, philip

klein, robin wright, and darren samuelsohn. washington journal, live, at 7:00 a.m. eastern on c-span. >> this weekend on booktv, fdr's supreme court appointees, and how the men who began their tenure as friends and s scorpion. find a complete schedule, and sign up to get schedule's directly to your in box. >> last may, u.s. capital markets experienced a so-called flesh crash which caused the dow industrial average to fall 1000 points in a matter of minutes.

witnesses include mary schapiro, and commodities future chairman gary dancer. this is just under three hours. >> we want to focus on how we could avoid or mitigate the effects of such events in the future. i will make an opening statement. i have been informed of the senator might be delayed, and he asked us to go ahead. i will then turn it over to chairman carl levin. also, on the roles of the committee on investigations, witnesses are sworn, and i will ask chairman 11 to do that after

my opening statement when the witnesses are introduced to do the official swearing-in according to the rules of his subcommittee. i certainly want to thank mary schapiro and gary against her for being here, -- gensler for being here, and commend them for the hard work they have done already to implement the dodd- frank bill. it was a spirit that has been noted of cooperation and collaboration, which is a model for all of us. thank you so much. i want to apologize that we had to delay the hearing, and we also understand a series of four votes will begin sometime after 4:00 p.m. this afternoon. it is our hope we can proceed, get the opening statements of our first panel, questions.

senator levin and i have agreed to shuffled back and forth. i apologize again for these four votes that are pending. let me now focus on the substance of our hearing. although the recently released report on the events of may 6 was thorough and thoughtful, the length of time it to complete was an issue. what tools do our regulators need to understand what is happening when it is happening in our capital markets, where it least very shortly thereafter? that is one of the first issues. what resources do you need to effected the overseeing of our capital markets which are evolving at a tremendous rate due to technology. in their report, the events that took place are reconstructed. i think that as a very important

point. the inter-related aspect of securities markets, and product markets, are such now that something happening in one market can not be easily isolated. according to the report, a single trade by a mutual fund was the primary causing a chain of events that led to the volatile swing. a regulated product produced significant impacts within sec regulated equity markets. i am sure the opposite could occur. even before the plunge, the markets were stressed and showing high volatility did to mounting concerns on the debt crisis in the europe on that date. it was against this backdrop, and a dow jones that was already down 2.5%, that the mutual fund initiated en el demaurice smith

-- and al gore as nick -- all gorothimc process to track the fund. his aim to create a group said it accelerated the rate in which the orders were activated. it was the largest single trade in mini-futures since the start of the year. the net effect of this order was to send panic into the marketplace. how could one order by one trader do this? how do we stop this from happening again? the events of may 6 bring into sharp focus the concerns about the efficiency, sufficient -- efficiency, and stability of our markets. the existing structure is governed by a regulation

national market system. one of the questions before us is how all the designee to be updated and strengthened? in addition to the january, 2010, concept release by the sec, and again let me commend you again for working on these issues brought the play, on possible revisions, the sec has responded with specific regulatory actions related to trading actions, such as the institution of a stock-by-stock circuit breaker pilot program. we hope this hearing will help understand some recent proposals, and answer some other important questions as well. these questions are long, but let me suggest a few. what did the flash crash tell us about the stability and vulnerability of the capital

markets, and to what extent, if any, can the may 6 problems be attributed to the current fragmentations markets suffered? what effect do technology-driven trading practices have on the stability and integrity of u.s. capital markets? what type of information, tools do regulators need? how can they more actively police across both products and trading venues? what are effective strategies for minimizing future dysfunctions like the may 6 event, and minimizing abuses? what are the effects of current structure on long-term capital formation in u.s. markets, and as a consequence the health and vitality of the u.s. economy more generally? we look forward to your testimony. i think i have probably listed just a few of the questions you have been dealing with diligently over the several

months. clearly, the cops on the beat, the sec, the fcc, need to have the same tools. i will close with an old saying by the great new england poet -- good walls make good neighbors. you are the folks that build the walls, and make sure the neighbors the hague. we hope you can keep doing that. -- behavior we hope you can keep doing that. thaw out, i would like to recognize the chairman ted >> today, u.s. capital markets are fractured, volatile to system failures and abuses, and are operating with overside blind spots. the very markets that we rely on to jump-start our economy and invest in america's future are susceptible to market dysfunctions that jeopardize investor confidence. i want to begin biased thinking

chairman jack reed, his ranking member -- i want to begin by thanking chairman jack reed, his ranking member, and those who have held hearings on this issue. we thank him for welcoming our subcommittee to join with them today to shine a light on problems that threaten u.s. market stability and integrity. the first fact that we need to grapple with is that our markets have changed enormously in the last five years. in the past, most stocks were traded on the new york stock exchange or the nasdaq. seven years ago, the nyse accounted for 70% of the trades in its listed stocks, but today, less than 25% of the listed stocks are traded there. what happened? there is a chart we will show

the stock market fractured. stock trading now takes place, not on one or two, but on 13 stock exchanges, as well as multiple of off-exchange trading venues, including three electronic communication networks, 36 so-called dark pools, and over 300 registered broker-dealer in turn allies ears. those the news might need more explanation. electronic communication networks are computerized networks that enable participants to post public quotes, buy or sell stock without go into a formal exchange. dark pools are an electronic network that are closed to the public, and allow members to buy and sell stock without

disclosing their identities or the details of prospective trades. a broker-dealer internalizer is a system set up to execute trades without sending trades outside of the firm. these off-exchange venues are increasing their trading values. most use high-speed electronic trading and escaped much of the regulation that applies to formal exchanges. these new venues did not appear out of thin air. they are largely the result of regulation that the sec issued in 2005. some called the resulting new world a model of competition. others call it a free-for-all that defies oversight and is right for system failures and trading abuses. both descriptions have some truth. trading competition has led to lower costs and fester trading, but it has also opened the door

to new problems. one of those problems involves system failures, of which the may 6/cresses the most recent example -- may 6/crash is the most recent famous example. on that day, the dow jones industrial average was crashed nearly 700 points for no apparent reason in a few minutes. both the futures and stock markets recovered in less than 20 minutes, and left investors and traders in shock. after five months of study, a joint study reported that the crash was essentially triggered by one large sell order placed dna but some market -- placed in a volatile market that used an algorithm. that one futures order, placed at the wrong time in the wrong

way, set off a chain reaction that damaged confidence in u.s. financial markets. in some ways, the may 6 crash was a high-speed version of the 1987 market crash, where a sudden decline the and -- decline in the futures market, led to a corresponding crash in the stock market and individual stocks. it is not the only type of system failure affecting our financial markets. mini-/crashes can become commonplace. on june 2, 2010, for example, shares in a large ohio corp. suddenly dropped from about $28 to $18 per share. the stock recovered, but the company was left to explain what happened. even after the pilot circuit

breaker program was initiated, and 13 other companies have had new -- similar experiences, including intel and cisco. a former senior nasdaq executive told the subcommittee that the nasdaq exchange has experienced single-stock flash crashes five times a week. the new york stock exchange told us these crashes are commonplace and attributed them to various glitches in computerized programs. single crashes might seem to be a minor problem, what happens if it is a basket of stocks or commodities? on november 29, 2010, three of the top five equities traded by volume were actually baskets of stocks. if a basket crashes in value, what happens to the underlying

financial instruments? on controlled electronic trading, in multiple trading venues, including futures, options, and equities markets, could be the result. many investors, by the way, are not waiting around to find out if our regulators have fixed the problem. according to the investment company institute, each month since may, more investors have fled our markets, pulling billions of dollars of u.s. investments. system failures are not the only problem raised by our fractured markets. another problem is the increased vulnerability to trading abuses. if traders, today, buy and sell stocks on and off exchange, simultaneously trading in multiple venues. traders have told my subcommittee that orders in some venues are being used to effect prices in other venues, and debt

futures trades on the regulated markets are being used to effect markets on sec regulated stock markets. some traders are also using high-speed programs to execute their strategies, sometimes submitting and canceling phony orders to defect prices. to get a sense of the trading activity that goes on sedate, take a look of the stack of paper -- that goes on and today, take a look of this stack of paper. this stack, nearly 5 inches high, contains the actual message traffic generated in the futures, options, and equities market, which respect to one major u.s. stocks over the course of one second.

one stock, in one second, produced over 29,000 orders, order modifications, order executions, and cancellations in all three markets, by the way. this stack shows in black and white how traders are now analyzing trades in all three markets at once, have been seen how the markets are interconnected. the imagine the same stack multiplied countless times, filling this entire hearing room, and the interconnectedness of the markets, as well as the potential for system failures and trading of use is becoming alarmingly clear. one well-known trader recently made this public comment. "folks, this crap is totally out of hand, and it is now a daily

game being played by the machinists, the only things that could react with this kind of speed, and they are guaranteed to screw you, the average investor or trader. go ahead, keep thinking you can invest." while fractured markets and high-speed trading are causing new problems and forms of manipulation, they are also leaving our regulators far behind. traders are equipped today with the latest, fastest technology, and our regulators are riding the equivalent of mopeds, going 20 miles per hour, tracing the chasing traders that are going 100 miles per hour. -- chasing traders that are going 100 miles per hour. i want to join in thinking

chairman reed. we are commending of the actions you are taking. here are some of the challenges -- the first that each exchange has its own rules and practices. despite the rules involved, no agency has a complete collection of data, much less a single data flow allowing regulators to see how orders and trades in one venue might affect prices in another. second, even if they have an integrated data flow, the current data systems fail to identify key information, including the names of the executing broker and customer making the trade. that means that regulators cannot use the electronic records to, for instance, a

trace trading by one person, or set up alerts to flag trades. instead, regulators have to figure out the broker and customer behind each trade. patterns of manipulation are hidden. the third problem is the sec has no minimal standards for automated surveillance by self- regulatory organizations. the quality of those efforts is all over the map. recent sec examinations of certain exchanges have found, for example, some effective surveillance systems that were on able to detect basic manipulations, or used such a restrictive criteria that they failed to flag suspect activity, review surveillance alert, and exchanges with only rudimentary or under-budgeted and investigative, examination, and enforcement programs. the fourth problem is that the

sec has not set up procedures to coordinate screening of market data to see a trading in one market is affecting prices and another off. given the strong relationships between the futures, options, and equities market, joint measures are essential. the impact of the regulatory and technology barriers is demonstrated by the fact that it said the cftc and the sec five months of intense work to figure out when happened over a few minutes on may 6, and i believe chairman reed made the same reference. over the past five years, there have been few meaningful price manipulation cases. one recent case involves a small firm which apparently used phony orders to bid up the price of several stocks.

in that case, it was found that over a three-month period in 2006 and 2007, they submitted phony orders and over 46,000 manipulations, netting gains of about five of his $75,000. apparently, the victims got annoyed on/off to research the manipulative trait -- enough to research the manipulative trading, and hand over the data. even then, it took four years to reconstruct order books, approval was behind the trade, and executives recently settled the case by agreeing to pay fines. traders and regulators have told us that this is not the only company that has engaged in, or is in gauging the in -- or is engaging in price manipulation in u.s. financial markets. in fact, one of the more

chilling example involves suspect traders located in china. are overseas traders tried to manipulate u.s. stocks? regulators are not equipped to find out. the may 6 crash and this case provide powerful warnings that we need to strengthen oversight of financial markets to restore investor confidence. much needs to be done. recent actions to provide for anyquotes and to set up a lot of trial are advances, but there is a long way to go, the tick away with respect to surveillance across marketed venues and the futures, options, and equities markets. there also needs to be a greater sense of urgency. the proposed although trail is expected to take years to put into place, and will not cover all of the relevant products and

markets, requiring executing broker and customer information. an essential component is in limbo, as it is integrating the trade data from multiple vendees. integrating trading data and market surveillance by the cftc and the fcc is not on the drawing board. i hope this will help to inject greater urgency to restore investor confidence. again, i want to see why, -- see why, chairman -- thank you, chairman reed for holding this hearing, and the leadership to a shown. >> thank you. let me introduce mary schapiro,

chairman of the securities and exchange commission. she was the former large non- government regulator for all oil firms doing business with the united states. she previously served as the commissioner of the sec and teh's chairman of the commodity -- and as chairman as -- of the commodity futures trading commission. our second guest is gerry -- our second witness is gary gensler, who prior to joining the department of treasury, worked for 18 years at goldman sachs, most recently as a partner in finance. before you begin your testimony, let me turn it over to chairman levin to administer the oath.

would you please stand? >> thank you, a very much. pursuant to the roles of our subcommittee, all witnesses need to be sworn in. do you solemnly swear the testimony you did before the subcommittees will be the truth, the whole truth, and nothing but the truth, so help you god? thank you. >> chairman mary schapiro, you may begin. >> thank you for the opportunity to testify on behalf of the securities and exchange commission concerning a stable, fair, efficient structure is the backbone of the equities market and an fortin engine to our economy. to the backbone strong in responding to route our

financial markets. one decade ago, the volume of stocks was executed manually. now, they're executed by fully automated systems in less than 1000 of the second. as you mentioned, five years ago they executed 80% of the equities they this did. today, it is about 25% of that volume. the remainder is among 13 exchanges, dark pools, and more than 200 internalized broker- dealers. 30% are traded where they did not make public their liquidity. we must keep pace with the changing landscape. more than one year ago, we issued a fair review of the equity market structure. as part of the review, we received hundreds of comments, some emphasizing the benefit of structure and others raising concern.

we have heard how our market structure inspires competition. we've heard about the benefits of interconnected markets and have been cautioned about regulatory changes may have on intended consequences. on the other hand, we have heard the concerns about the quality of price discovery and whether this offers a level playing field in which all investors convergys paid meaningfully and fairly. >> as we consider regulatory response is, we will evaluate issues with its focus on obtaining the appropriate data and analysis to support our next step. we will ask whether the changes we consider will aid in investor protection, enhance competition , and improve enforcement. in this context, the prism through which i view the role of market professionals, whether they are changes coming etf's, high for equity traders, it is

whether they compete in ways that altman the benefit investors and the companies seeking to raise capital. our market structure review is not a theoretical exercise. the events of may 6th, which profoundly impacted investors, crystallized the importance of this effort. is violated -- has highlighted the need for regulators to watch millions of trades, multiple markets. today, the exchange has its own unique and often incomplete data collection system complicating efforts to restructure an activity that can involve millions of records across thousands of exchanges. in the response, the commission has discussed a consolidated audit trail. this would, for the first time, allow regulators to track trade data across multiple markets, products, and participants. we would also be able to rapidly reconstruct trading and analyze unusual market events.

since may 6th, we've taken a series of matters to read -- measures to reduce chances of this event reoccurring. we have approved a circuit breaker program that limits volatility. we approve rules designed to bring order and transparency. we adopted a new rule to require brokers and dealers to evers controls in place before providing customers with access to the market which bans naked access. we improve rules to enhance the the quotation status for eliminating seven-quotes. in addition to regulatory responses, we are lobbying our efforts with the current realities of market fragmentation and high-frequency trading. changesking fundamental in how we approach regulatory organizations including

potentially abusive high- frequency, high ", or other algorithm make strategies. at whether various market for dispense have awfully exploited the markets, manipulated price and volume of securities, or an injury to the market volatility at the expense of investors. additionally, we created specialized markets needs unit to conduct investigations in particular the high-risk program areas. we cannot turn the clock back to the days of the trading on the exchange floors, but we west continue to analyze market structure issues to ensure the rules keep trace -- keep pace with the new trading realities and find ways to improve our markets, provide transparency, and improve investor protection. we look forward with working closely with congress and the four to answer your questions. thank you. >> thank you. mr. gensler?

>> good afternoon, members of the two subcommittees. i think you for inviting me here today and i am pleased to be here along with chairman schapiro. this is our seventh time testifying together and the star third time since may 6th. cftc markets have transition from face-to-face to electronic trading. now represents 80% of our markets. as a father of three daughters, i have learned much about the new world of twitter, social networking, and certainly tax thing. just as we cannot turn back at that clock, we cannot turn back the clock which now we have of automated execution, algorithm markets, and high-frequency trading. the may 6th events highlighted the cross-market links you spoke about regarding prices and volatility in securities,

futures, and other derivatives market. it is all enabled by technology. price discovery, which may occur in any of these markets, futures or securities, can move rapidly over into correlated products in other markets where small disparities in the crisis arise, even in millisecond this, where you can try to profit in the arbitrage between these markets. the cftc surveillance program works to promote market integrity and protect against fraud, manipulation, and other abuses. the cftc is coordinating closely with the sec for rulemaking and limitation with dodd-frank. after may 6th, our staffs probably shared the transaction data with regards to that day's events. the exchanges and self-

regulatory organizations conduct from one market surveillance and also coordinate for a closely, not just on may 6th, but other days as well and have regular interactions. in terms of data, the cftc received futures data on a daily basis. it is important for us to give us the -- get the very next morning. we do not regularly get the order book because we do not have the resources to get that. on may 63 at best for it. there were 14 million orders. i calculated that it would be 476 times more than the stock right there for that one day in the 1 contracts in one month and that was why it took awhile to analyze the data, but we did get it and share it with the sec. in the future market places, we have a pre-trade risk management functionality. we call them safeguards.

they protect against extreme movements, maximum orders, protection against stock-loss orders, and market causes, more of a time-out back to the children came. exchanges are required to have these and executing brokers also have to have pre-trade risk parameters for uses of the clearing houses for the transactions. last week, the commission put out a proposal that mandates that markets have pre-trade risks safeguards and ask the public for their views. the events of may 6th and the dodd-frank act present new challenges. i want to highlight a couple which are the new authorities given to congress to work with regards to destructive trading purses -- practices. it prohibits three specific

things, but we are also asking about other acts and have put out in advance notice of proposed rulemaking. the cftc current funding is less than what we would need to really do the surveillance, not only for the events of may 6th but the new dog-frank pactiv. we currently have 680 full-time staff. we estimate that we will probably need 400 more staff. our current funding from last year was $169 million. the president's request for 2011 is $261 million. we anticipate we will have 300- 400 new applicants that will arrive next summer which are swap dealers and execution facilities. we have no intention of robo- signing these. we will need the resources to do

that. thank you. >> thank you both, very much. chairman gansler, i want to thank you, but also i think you have raised a troubling concern which chairman schapiro also suggested. you say, "budget permitting." those are your words. you hope to hire analysts in a lot of the skills you need. according to the numbers in the fiscal year 2011 request between 2005-2007, the sec experience three years of a flat or declining budgets which in the inflation means a decline. the sec lost 10% of its workforce. by 2008, it was readily apparent to every american would be this

function in our marketplace. even at the 2010 budget level, if you stay there, your workforce is still below the 2005 level, as i understand it. u.s. and german gansler both point out with a dog-franc that there is a significantly expanded -- dodd-frank there are significantly expanded responsibilities. to what extent our staff levels tampering your ability to improve and strengthen oversight of current high-tech trading, at implementing the provisions of the dodd-frank act and to try and keep up with the most dynamic and rapidly changing marketplace that we have never had from 80% of trades on the exchanges and to a fraction of that today.

then me ask both of you to comment. you can begin, chairman schapiro. >> thank you, chairman reed. resources are a concern. as you point out, we have had a very volatile history of a finding. while congress has been generous in the last couple of years and we have been able to staff up, we are really just now reaching the 2005 levels of staffing and a technology spending. we have been fortunate to be able to attract amanda's talent to the agency to supplement our already talented staff. we are bringing in people with expertise in algorithm trading from trading desks, hedge funds, to try and help us have the capability to do the job we have been charged with doing and to take on new responsibilities that we have been given under dodd-frank. it is essential that we be able to bring that kind of skill set

into the agency. when u.s. and foreign initiatives really is the consolidated audit trail. i would love to respond to chairman levin's points about how long this will take. we think there's good news on that front. in order to make use of the data we have received from a consolidated audit trail come even understanding the changes will be the primary user of data, we need people in the data management, quantitative analysis, servers and system capability to receive something like 20 terabytes of data per month. our needs for dodd-frank and what the public needs, we need significant resources. >> chairman gansler, co-head. >> thank you. our agency, on a smaller base,

we will be asked to take on the swaps market which is approximately $280 trillion, 20 times our economy just charismatically. we currently oversee a $40 trillion market in the futures market place which is seven times the science. we think we need 70% more people. parted the efficiency comes from technology. we have asked for $80 million which is part of the president's request for $261 million. that is to deal with the data. a lot of data will be in data repositories, but we both need to be able to come in essence, put a pipeline in the day to search, analyze, and have automated surveillance, testimony. finra currently has surveillance alerts on 300 different algorithms. i can assure you we have a fraction of that right now. we only started to program our

own algorithms in the last two years in a serious way. >> let me ask you both. perhaps this may be a point you may want to comment on for consolidated audits, but we are asking two agencies, and i commend you for your collaboration and formally and formally comment to watch these markets, to have an ongoing insight into what is going on. how're you doing that in formal and informal ways? how're you coordinating? i presume, chairman gansler, the of something comparable to the consolidated audit trail. let me begin with chairman schapiro. you may even with to talk about the timetables. >> the collaboration has been superb but between the two agencies. may 6th is a great demonstration

of the interconnections between the two. the consolidated audit trail is designed in the first instance to give us a single consolidated set of data with a really all the information one could want with respect to the equities and options markets. it would be the view that over time as an absolutely include all related financial products to include municipal securities, government securities, and futures that are equity products said that we have a truly comprehensive review of the trading of instruments in lean economic substitutes otherwise it will not be a very effective system. the initial elements proposed for the consolidated audit trail were about $4 billion all in and as long as three to four years to implement. we would ask that they develop a

plan for the consolidated on a trail and the sec would set the criteria. there are many data elements in order to have the information that we need. as a result of our meeting with a number of technology firms we believe that we can dramatically reduce the costs it is the timetable to implementation because a large portion of those costs were thought to be necessary to allow broker- dealers to deal with the reporting system to get the information into the repository. we do not think that is likely to be necessary and that there are technologies that already exist that can be utilized in this space. we are hopeful that when we come to approve a final rule that the cost and the of limitation. will be down significantly. to my mind, that would lead to more quickly bringing in all of the related products we think are necessary for the audit trail.

>> in that regard, chairman gansler, you both essentially regulate the economic equivalent of each other. i presume you have a complementary vision about how you can build something like the consolidated audit trail. can you comment? >> we have a less fragmented market now. and in the swaps world, it has become fragmented with these execution facilities. every morning, but we have the full transaction files from the day before in the futures were already in our system and analysts are able to analyze it. on the evening of may 6th, we knew of the single large trader, the 75,000 contract. we told the sec that evening and some of the other regulators that evening. we interviewed the executing broker the morning of the seventh. we were fortunate in that way. we do not currently have what is called the account ownership and

control information. we put out a role this summer and we need to do that. we have the data, but we cannot always have the ownership. we do not have the resources to analyze the odor of it -- order book every day. it is $40 million in one contract. imagine when the entire market magic -- was in the billions of orders. the third challenges with the swaps market and how we abrogate the data across the swaps and futures market and of course aggregate. i do believe that we have work to do to institutionalize our cooperative nature. it has been a great -- a great working relationship, but our staffs will change. we do have work to do to institutionalize some of this. >> your correct -- currently working on and is -- an institutional as asian on communications systems? that is ongoing? >> yes in the midst of a lot of

rulemaking. i recognize the chairman. >> chairman schapiro, would be less than half the cost and half the time? is that too optimistic? >> any estimate i give you will be wrong. we think between 50%-8% of the current cost estimate is associated with the requirement for the broker-dealers to build the recording systems. there are existing technologies that would facilitate that and it should make a significant change in the cost of all. >> it could be as much as half? >> i would hope so. i think it is important to point out that while it is a very large number, $4 million, either market trades $220 billion every

day. it is a big number, but there is a lot at stake in getting the market structure right. >> absolutely. that is why we are pressing. do you think the to be done for half of the previously estimated time? >> i do not know when i do not want to be misleading. it would very much be my hope. it is out for me, perhaps, one of the most important things that could accomplish that the sec. >> in your opening statements, you both the knowledge that market prices in both the venues were simultaneously in effecting each other and that futures and stock prices regulated by your commissions also affect each other. in my judgment, since these markets are so connected it would seem to me that there is nothing preventing someone manipulating one market to move to another. let's take a look at exhibit

two. i do not know if you can see this or not. turn around so they can see this. that drew trader was entering orders he never intended to have executed in one market. it would move prices to his benefit in another related market. after moving the market price and taking advantage of the price movement that he caused, he then cancels his original orders allowing the markets to return to normal. that seems to me to be a variation of what trillion traders did but this time using two traders. but question to you is not that type of trading strategy be a manipulation? i am not asking whether it is, but may that type of strategy be

manipulated? >> i think it is entirely possible that it could be. >> because the statutory framework relates to intends, it would depend on the parties' intent, but it could be if the intent was there to manipulate the market. >> are thinking of testified already that since people trade in multiple markets that are regulators need to be able to compare the trading data from more than one market to see if trading in multiple markets is being improperly used. can your agencies coordinate

your automated surveillance efforts to spot this type of cross-market price manipulation or anything else that may be appropriate? is that a possibility? >> i think it is a possibility with the consolidated audit trail. we have two agencies with different jurisdictions and we would ultimately have to agree to require that the exchange's in the market for this offense under two different agencies jurisdictions to agree to contribute data to the same consolidator and audit trail. i do not know of any reason, if any, if there is a will to do it and there is the technology -- technology capacity why we would not, frankly. >> we already do it. i would say it is more of an ad hoc basis, an event-driven basis. we have had some very good collaboration's. to institutionalize this may take rule changes on both sides

and self-regulatory organizations from the two jurisdictions sharing information. that would be worth while to consider. >> if you could consider that, it would be helpful. chairman schapiro, do you currently have an automated surveillance to detect cross- market manipulations? do you have that in place now? >> we have some tools in place that allows us, upon request of the exchanges to provide information. we can see activity in the options markets and equity markets, but we do not have routine capability to see across to of the derivative markets, over-the-counter markets. we really do not have the tools to efficiently utilize the data

that we do get. >> and that is where you hope the consolidated audit trail will help obtain that? >> as long as the -- as well as the large trader reporting system that could be in place much sooner them give us the capacity to see what larger traders are doing in our market. >> when do you think that would be possible, the reporting system? >> it was proposed earlier this year. it would be my hope that we would be able to finalize the rules for both that and the consolidated audit trail in the new year. i do not know of the top of my head but the time is, but they are measured in months and not years. >> finra has an order audit trail system. it is called boats? -- oats? is that something which you could use?

>> that is a great question. kenner has -- finra has oats. it is a philosophical question almost. oats covers a significant portion of the marketplace. we could look at whether to spend resources and time trying to make it better and more robust, more broadcom or we could take the resources and time and creed a genuinely consolidated audit trail system that is scalable, capable of capturing all the economic substitutes for equities. i think we have said in the consolidated audit trail proposal is exchanges and finra would come to us with a plan on how they would in cemented consolidated audit trail that

would give us all of the data that we use as regulators and that we expect them to use as a market survey lawyers. we leave the chores of the technology to them. >> to summarize your previous point, basically, at the moment, you are relying at someone identifying a problem for you first and then you look at across markets? >> that is somewhat true. it is someone identifying a problem or someone on the staff sees activity and they could beat concerned about the spike in volume, for example. then we would utilize a tool to investigate whether the people who traded ahead of that announcement may have had access to material of the non-public information. it is a combination. >> let me raise a question before have to run off. how many minutes? we are talking about trading

abuses. i want to mention trading abuse, it looks like it to me, involving credit default swaps. there are not subject to regulation before dodd-frank that includes credit default swaps against mortgage-backed securities and they made major contributions to the financial crisis. now we are of -- now we have dodd-frank. i want to give you a description of something my subcommittee found during the investigation of the financial crisis. your staff has seen some of these documents that we were able to get to you, i think yesterday, that we uncovered during our investigation. i want to get your thoughts as to how either of your agency's could monitor swaps

electronically to detect a type of market squeeze. in 2006 to spring of 2007, major financial investors have begun betting against sub-crime related cdo's by purchasing credit default swaps. soon the prices rose. no one in the market was willing to offer any more cbs protection against the body of sub- formulated cdo's. goldman sachs went to kenya to buy them but none were available at a reasonable price. goldman's 8 yes desk decided they would offer -- goldman's asset desk decided they would offer cds's. when the sell off was large enough, they planned to move in

and purchase the cds's themselves. this squeeze was described in exibit 3-a which is a self evaluation done by a goldman trader at the abs desk that participated in that activity. i will include that in the record at the time. on page 15, the bottom of the first paragraph. "in may as we remained as negative as ever, the market was trading very short. after the short squeeze causing capitulation of the shorts.

this seemed doable. when the news came in, we stopped waiting for teh shorts and just reinitiated them ourselves.' the trader denied they ever intended to squeece the -- squeeze the market.in may 2007m, , the manager of the abs desk wrote emails encouraging the squeezing of the market. in the first dated may 25th. these should be in front of you. "we should offer a named protection to cause pain."

"we should start killing the named shorts. let's pick high quality stuff and offer protection. this will have people demoralized." he also denied the effort to squeeze the market short. he could not explain why he used the terms he did including "this would cause people maximum pain and" in an effort to restore balance. under emails suggest the attempted short squeeze by goldman-the impact of their own clients. for several weeks as goldman tried to drive down the price of protection, a required some of their clients to make collateral payments to goldman on cds

production had bought at a higher price. emails asked how they could owe more collateral when they had shorted the mortgage market which was declining in value. in the end, short-sellers did not sell their shorts at the lower price. instead, most went even shorter and goldman abandon efforts to squeeze the market. even after goldman a banded the efforts, some more harm by the lower prices. this is my question. chairman gansler, you are familiar with short squeezes in the commodities market. would this type of attempted short squeeze in the mortgage- backed securities market trouble you? with this trouble you as a conflict of interest or as manipulation on the part of goldman? mr. gansler? >> are you sure you did not want chairman schapiro to go first? in all seriousness, i am not

familiar enough with the facts and these are the first time i have seen these documents. in our markets and the futures markets, manipulation relates to intents and to distort the price. there is a four factor test about price manipulation. dodd-frank broadens that and we have a rule out on disrupted practices which we will get public comment on which will be very helpful. in the current statutory framework on price manipulation, you need to have an intent to distort a price and the price has to have been distorted. those of the factors that have to be applied. >> chairman schapiro, let me ask you a question. does the sec have the ability to

market -- monitor these markets? >> now, no. >> would it be helpful to have it? >> we will have better access to based on the proposals we did last spring and also the authorities under dodd-frank. it would obviously be helpful. that was troubling language you read it to us. >> thank you, both, very much. >> again, we apologize for the tag team actions caused by the votes. one point that i want to raise, and this goes to the conceptual

issue. the resumption of most people, not the sophisticated traders, but people who own a few stocks, is that the value of stocks, the quiddity associated with the stocks is directly a function of their economic value, the same thing with these instruments and derivatives, that there's a real economic value. one of the issues we have to deal with is the proliferation of these algorithmic high frequency trades. some of them do not take into account the fundamentals of the instrument, the economic value, the dividend, the status of the municipality issuing them. they simply say if enough of these are sold, we sell. if we start selling, another algorithm kicks in. to the extent that we get further away from the economic values here, does that cause not

only concern, but is that something that is good for the economy? it may be a ninth question, but i will oppose it. >> i do not think it is a ninth question, but it is a fundamental question we are grappling with. it is traders verses investors and what concentrating provides liquidity to the marketplace that enables investors to get in and out of positions successfully. when we meet with public companies, i always ask this question of them and retail broker-dealers. how're the markets working for you, public companies raising capital, what are your customers and retail broker-dealers looking for in the marketplace? there is concern over whether the discovery mechanism is efficient or whether we have the development of a two-tier market that is hindering the price discovery, whether the playing field is level so that the long- term investors will be buyers

and holders of securities have an equal opportunity to get the best price in the marketplace as the traders do. issues like fees and echolocation, acts of proprietary data seem to skew the ability for others in the marketplace. i do not know the answers, but they are on the minds of the retail public and on the minds of these companies for whom these capital markets are their life's blood. this is their capacity, their capability in these markets to expand, grow, and create jobs. these are exactly the kinds of questions that we're trying to explore for conflict relief when we asked about the quality of the marketplace and the quality of our market structure. when the best ways to measure that in addition to each other questions about the role of algorithms, harford critique traders, as well as bark close

-- dark pools of liquidity. one of our rules is to amplify our questions in the broader context and in public debate. also to see if we can derive effective answers over time. i appreciate what you are doing. i know what you are doing. your efforts, and please ask us how we can be helpful, to find real answers that these are answers that will be posed that you point out adroitly, not only by the investor on the street but large institutional investors, corporations etc.. the nature of a functioning market reverses a highly lucrative trading desk. and they are intensely two different things. >> to make an excellent point. in the round table that we held

back in june to the cash market structure issues, one comment resupplied a survey that they had gone with a number of investors across the range, not just investors but trading firms and others. even large institutional investors in the survey, half of them said they thought the market structure was fundamentally working for institutional investor interest said that point. >> german gansler, your comments from your perspective? >> i think markets have have the confidence of the public, not just the investing public, but capital formation and the markets. whether it is a farm, a ranch, or a modern financial company hedging the risk. i think that markets for decades have included hedgers, investors, and speculators and have even included the dealer- trader. in the old days, it was someone in the pit of the chicago

futures exchange or on the floor of the nyse. today is someone with a computer to is that maybe, locating. we need to make sure that these markets, that everyone has an equal access to these markets, that they are very transparent which is the court dodd-frank of the new -- the core of the new dodd-frank and we do police them against fraud and of manipulation. we have to police against those manipulations and have the tools to do so. >> i think have asked this question in different words, but succinctly, so much of this is market activity. you alluded to this that the obvious thing is arbitrage is

something that is attractive because if you can catch two markets in the amex match that it is usually a profitable exchange. again, anything that you want to add with respect to the steps you are taking to ensure that cross-market activities, someone trading the future to affect the price of an equity so that they can short or go long on the equity, what are you doing, and chairman schapiro, what are you both thinking about doing? >> candidly, most of what we're doing is within the jurisdiction we are in. the cross-market arbitrage with in futures, the options on futures, and most recently the swaps market, we will try to work and make sure that we really do have the data set within these markets and can aggregate and do surveillance across the markets. they can be anyone futures contract across months which is

called a spread trade. we need to do more to institutionalize across the markets as well. it is within our jurisdiction and that across our jurisdiction. >> i would agree. our problem is we have so many markets and so many venues where trades are executed that just getting to a point where we have consolidated data about the equity markets would be an enormous step forward. it would be my hope that we have a consolidated audit trail and the ability to have surveillance across related instruments. >> in your release in january 2010, chairman schapiro, you said, "regulation has not kept pace with the evolution of the securities markets." i assume you would both agree with that? >> i certainly agree. >> this may be another night in question. there is a window to catch up.

if you cannot catch up, are we always -- is this something that will be beyond our capacity to regulate, frankly? this goes back to the issues of resources, personnel, technology systems, etc. this is not your father's market or your grandfather's market. it moves at something close of something much lower than what is happening now. i must say that one of my theories is this is a critical moment to not only get to speed so we are regulating in a near- term real time basis or an effective basis, but if we miss this moment that the gap will widen significantly that regulation will be in not

effective. the second part of this is the proliferation of markets where you do not even have a perspective into it. comment on the two major points is where i will conclude. >> there are two critical things. what is the need for regulators to be up to speed for the purposes of policing the market, to understand the activities happening where there is abusive practices going on. law enforcement is looking at that with 12 different types of trading strategies that we think of the potential to be problematic. we have had the capacity to do that with the audit trail and human and technical resources. i think we also have to look at whether there are regulatory changes necessary in the marketplace in order to create a stronger infrastructure. he mentioned things we have done already with respect to a relatively simple things like

circuit breakers, eliminating some-quotes, access to the markets. we also have a menu of ideas for other steps that we may be able to take that the sec that would strengthen the backbone of the market structure including requiring broker-dealers to have procedures to prevent algorithms from behaving destructively, which we saw on may 6th. whether there should be obligations on market makers to either support the market in where police not to trade in ways that the track from the quality of the marketplace. monday that the quality of the exchange data fees and whether the public data feed is sufficiently robust in comparison to the one they pay for in a lot more money in a proprietary context. we need to assess the fee structure within the exchanges.

we're talking now very actively about migrating to a limited up- down model which would limit future models. there are a lot of things for us to do that will be incrementally important, but important to try and solidify the market structure in addition to trying to do a better job surveillance across all markets. >> german gansler? >> maybe because the glasses half full, i am an optimist and we have certain tools. we leverage off of the exchanges. we've leverage off of the self- regulatory organizations and also the big market participants, the dealers and the future commissions merchants. we leverage by certain tools. we publish rules. we update them. they are never quite up to date, but we update them on a regular basis. we use enforcement actions as well which is sometimes enough

to the market when there is a bad actor or manipulation and so forth. these pre-trade risks safeguards are absolutely critical and it is why last week we published a role that included that the exchanges themselves, and they have had these in a voluntary way, and we have been fortunate to have very robust pre-trade risk management, and another required the pre-trade risk- management, so i think we always have to leverage off the market participants and self-regulatory organizations. the last thing we use is transparency. i'm a big believer that transparency helps economic activity but also helps, in a sense, the regulators. you get more people bringing information to you, too. >> thank you very much for your testimony, your great effort at both the securities and exchange commission and the cftc. thank you very much. i am sure we will meet again.

thank you. >> is the second panel could come forward? panel can come forward. >> there it is right now.

>> let me introduce the second panel. them i am awaiting the second to return. i can introduce the panel. our first witness, the social professor of finance at georgetown university.

prof. angel focuses on markets. he serves on the board of directors. our next witness this thomas, brokerage firm with 5000 equity capital. it provides high-speed technology. third is the ceo of tradeworks. he held several positio at

wall street firms. our fourth witness is kevin cronin. he is responsible for many firms. started invesco in 1997. he is currently the head of the equity market and buys series. does the largest with the united

ates public. now pursuant to rule 6, would the gentleman please add fan racial right hand? -- please raise your right hand? >> they warranted the sec in writing. the markets are vulnerable.

it can happen again. our market is a complex network. of all the broker-dealers, media enties, it is a complex ecosystem purda. most of the time, it works pretty well. this better than it did 20 years ago. a market has the capacity. it can only handle so much

before it chokes. our market is overwhelm. if you live get the history, you will see that it is going over and over again? we sell one in 1987. we need safeguards for the market network. the network was going crazy.

some people grumble about market fragmentation. we have literally hundreds of different financial regulators. they do not always play nicely with each other. there is a lot of duplication. most of the regulators have a pretty narrow mandate. they are hundreds of miles away. it makes it really hard. it makes it much harder to figure out what is going on.

he saw how long it took the regulators to figure out what was calling on they need better market intelligence. this is less than half of what investors learn from burning madoff alone. what can we do about this? there are political forces that make it very hard. we can deal with this fragmentation by putting all the agencies ione.

it will make it easier for them to find them what is going on. and still attract the kind of the market people will need. we need to think about how the markets are looking the need to pay attention that the number of public u.s. companies has fallen by almost 50%. if we ran out of public companies, we've not had a job. it is listed on our exchanges.

if each of them were responsible, that is 2 million jobs. this to make a big dent in our unemployment. there are a l of reasons for that. we are losing our capital market. thank you very much. they are making a part of the record. if you want to summarize, feel comfortable doing that >> a broker is a market.

customers have about $21 billion of assets. this is my worst nightmare propel. imagine high-frequency trading. these operations exist all over the world. they using the members. as they close, more are our

troopertriggers. it is down 30%. brokers are like dominoes. it makes a huge ofit. the market realizes that it is causing the prior year. on the other scenario, there is

confidence in the market. this is not far-fetched. it could be a terrorist act. >> i have four recommendationsti explained in detail. these markets are critical for the surveillance.

in july of next year, they have access to this right away. seven months is much too long to continue. it is cutting down over a million people every day. the ability to extend orders is there. it cannot be sending this to exchanges.

the sec should improve this. it is associated with each trade t. it is bizarre that they must create in exchange.

it is traded. allows it to happen. it brings securities back to the exchange. the current broke for only from 9:45 p.m. to 3:00 p.m.. also, they should begin the intervals. everyone can recalculate what is allowed and what is not allowed. there should also be a marked

the cannot tell our transactions to be outside. it could result in insolvency but the.

>> it consists o highly complex algorithms. including stocks and options. prevented this is an opportunity to share it. is competent could get -- they

can meaningfully to asss this preve. what impact does it have on liquidity? how did the market interactive the to other? the public should not be forced do use these answers. it is needed to boost the market. the market has become too complicated for ordinary investors.

consider this like chess.

rather than minimizing fragmentation, they guarantee that the new exchanges would be routed to them.

the regulation -- the regular jurors exploited the regulations themselves. they managed to ignite a massive technology arms race and making speed of transmission more critical than it was before. a more heightened appetite for more will meet -- more rule- making exists. proposals abound for these nonexistent problem. it is easy to conjure up speed limits and order cancellations. it is easy to see how they harmed investors. when such rules are device, world-class engineers with a profit motive will be there to exploit them. it is clear who will win this battle of wits. there are strong opinions on how to fix market structure. rule-making should be supported by imperial -- empirical

analysis. adding ambitious or superfluous regulations is guaranteed to backfire by and i think unintended consequences. such a rule making will not restore investor confidence in our markets. there are flaws in our existing regulations. i look forward to the opportunity to elaborate on these topics. i ask that the entirety of my written remarks be included in the record. >> they will be. >> thank you chairman and members of the subcommittee for the opportunity to speak here today. i am pleased to participate in this hearing to talk about the integrity of the u.s. capital markets. invesco has assets under magic

-- assets under management of $100.20. -- of $120 billion. the most important aspect of the capital formation process is that it attracts long-term investor capital. it is important that the primary and secondary capital markets are transparent, effective, and fair. to that end, it is essential that rules and regulations are in place to govern the markets and regulators have the tools to insure the stability and integrity of those markets. investor confidence is the key to robust security markets. investors, both retail and institutional, are better off than their -- than they were a few years ago. there has been innovation that has enhanced investor access.

investors have more choices to control how to execute their orders. for the past several years, long-term investor confidence has been challenged by a series of scandals, but the crises, including the crash -- including the flash crash of may 6. regulators must ensure that securities markets are highly competitive and the efficient as well as transparent. it should be, above all else, fehr. today's market structure is far from perfect. the event of may 6 brought to the forefront several inefficiencies in the current market structure. perhaps most significantly it underscores the absence of a mechanism that addresses the ultimate -- volatility of a certain stock level.

not surprisingly, the market making mechanisms provided no liquidity to investors in times of market stress. remove stability and volatility from the markets. this is not possible. the volatility related to its efficient market structure would be critical to promoting investor confidence going forward. these issues have been addressed or are in the process of being addressed by regulators. the actions of may 6 will not be removed by these actions along. there must be a coordinated, measured, and inefficient effort to advance surveillance to thwart nefarious behavior. there are 1314 -- there are 13

for-profit exchanges. this is a welcome development from our perspective. the rules that govern the exchanges should be consistent with the goals of fairness and equal access for investors. one potential concern we have is that it has ignited an electronic arms race where speed appears to be the singular objective. speed is an important variable to consider in execution of trades. price is the most important variable. buying stocks at the right price is what long-term investing is all about. there is a point where speed and robust price discovery diverge. price must be understood by exchanges as they raced to make -- onees at 1 billion/t

billionth of a second. we believe that investors need improved information about order writing execution practices to make better informed decisions. today 60% of the trading in u.s. equity markets is contributed to high frequency traders. given the recent ascendance of high-frequency trading, there is not much known about these practices. there are many benefits of high- frequency trading practices that provide valuable the quiddity and consistency to the market. we are concerned that some strategies could be considered improper or manipulative activities. order a dissipation or -- order

anticipation provides no advantage to the markets. they prey on institutional orders. there was a recent case brought by regulators or improper activity. we are concerned about the ability of regulators to detect nefarious behavior. it is not where it needs to be. regulators must address -- must address the increasing cancellation of orders. 95% of all orders entered by high-frequency traders are subsequently canceled. some come to the market with no intention of trading. under the right circumstances, this could overwhelm the system also capacity, causing massive system failure and trader disruption. there are different types of investors and participants that can drive.

in the interest of long-term investors and short-term traders. we need to ensure that there are no obvious the prophecies -- abusive practices. they should not contravene the interest of long-term investors. >> thank you. >> chairman, thank you for the opportunity to testify today. i served on the regulatory authority called finr. -- finra. we performed market regulation under contract. we are responsible for abrogate the and regulating 80% of u.s. equity trading. our activities are overseen by

the fcc. the fcc has oversight authority. how and where trading occurs has devolved aggressively. high frequency trading is now commonplace and has contributed to the fragmented market that exists today. increased competition has resulted in a narrow spreads. it can also result in vast electronic removal of liquidity, as we all observed on may 6. the events of that day brought to the forefront several areas where increased transparency can be brought. we have participated in these discussions under the leadership and direction of the sec. there are important changes that can be made as described in my written statement.

we have already been scrutinizing trade activity. in september we found a new york brokerage firm and suspended several individuals or the use of high frequency trading strategies. non-bonafide moving orders generated selling and buying of specific stocks. by creating a false appearance of a fire and selling pressure, traders obtained advantageous prices that would not have been available to them. we have pursued instances of this and other illegal trading strategies. the risk of missing instances of manipulation, lost sales, and abusive short-selling is still unacceptably large.

it is clear that market quality can no longer be insured by a single exchange. as the sec recognized, equity markets have created an environment where there needs to be proper surveillance. there needs to be uniform data, reliable data, and timely access

to the data. we believe the most timely way to achieve the goals is to expand existing systems and consolidate exchange data with discreet new data into a central repository. building up existing systems could reduce the cost and time required and integration of the audit trail into existing systems. changes in financial markets have necessitated adaptations among regulators across a wide spectrum of issues. the practice of regulating the markets are a more -- is a more complex task. it is a pressing challenge. we are hampered by the lack of a comprehensive and robust consolidated audit trail across the equity markets. we will work with congress to help bring about a consolidated audit trail that will

facilitate more effective surveillance. thank you for the opportunity to share our views. i would be happy to answer any questions you have. >> thank you for your testimony. as soon as we conclude, we will recognize the senator who has just joined us. we want to focus on the market participants.

>> they do not have they tools that they need. we should not wait until we get this consolidated artistry -- consolidated audit trail. they can keep a trail of their own orders. they can record the names associated with each order. if anything happens in the market, they can go around and ask who did this trade. please send it to me tomorrow. it does not cost anything to do that. it can be done today. thank you. >> mr. narang?

your comments? >> in terms of what data the regulatory bodies can benefit from, i support the acquisition of data that helps the regulators engaged in analysis of various types, such as the audit trail. i say that as somebody who would be affected by that. i think there are some lesser known items that could be useful many people have pointed to the analogy. to aregulators are akin moped on a highway dominated by

100 mile an hour race cars. the regulators need to be able to see the markets in the same way that the most active participants see it. the regulators need the direct data from the exchanges. they need to be able to synchronize the data in the same way that a high frequency trader would. that means they cannot just rely on time stamps the exchange put on their -- on there.

technologies are out there to allow you to efficiently construct order books. the data itself is just the starting point. one of the things that makes me nervous is that the sec has -- barely has the ability to analyze the data it already possesses. adding 100 to 1000 times information is not going to help if the analytical capabilities are not augmented. the main thing the and then -- the analytical capabilities are missing is the ability to analyze security spaces. the majority of the volume that

occurs in the markets is premised upon the fact that securities have simi-stable correlations to each other. -- semi-stable correlations to each other. regulators have no clue as to how that works and no material to analyze those defects. those effects are structural issues. the regulators need to have analytical tools in doubt with those capabilities. >> having the ability to analyze is not going to get us where we

need to be. this will be an effective deterrent to the extent that it is in place. but i do not agree we have the kind of time it sounds like it is going to take. this is something that needs to happen. >> there will be a second round. that to me recognize senator 11. -- let me recognize senator levin. >> mr. peterffy, you describe your worst nightmare. every member of the panel heard the description of your nightmare. i wonder if the rest of the panel believes that the nightmare is plausible. >> it definitely could happen. our market is complex. there are things that can go wrong. murphy's law will strike. there will come a time when a

day of heavy volume comes. something is going to go haywire. we need to have good safeguards in place to protect us the next time it happens. >> this was an intentional effort on the part of somebody who had as little as $50 million and a few computers and a couple of programmers. in any event, you would agree that that nightmare scenario is possible. mr. narang, do you believe it is plausible? >> i think it is extraordinarily plausible. a large trader could impact the market.

that nightmare scenario with a high frequency trader that controls $50 million is utterly preposterous on its face. you can do the math. the trade by waddell and reed on may 6 very likely have a price impact of 2.9%. if you extrapolate from that what a $50 million capitalize firm could have done on that day at that same time, you come up with about three basis points. it is entirely implausible that a firm like that would exhaust its entire capital base before the market would notice. >> mr. cronin, do you believe a scenario like that is plausible?

>> it is possible. >> i fall somewhere between my fellow panelists. is implausible, but it is not impossible. there are structures in place. it is not a comforting thing to rely on risk control. there are steps that the sec has taken in the adoption of its rules. it that will go a great way to making that scenario more implausible. >> mr. peterffy, you want to comment on mr. narang's comments. >> yes. you do not need to have any capital to send an order. the orders are not seen by the broker. you only need the money the next day. that is when the clearing broker gets the trade and he says,

where is the money? in this scenario, there is a lot of money there. i enter the profits as the trader sells them down. even with money there, it is too late the next day to discover that all of this should not have happened. that is why naked access is a problem. that is why these trades should be screened. >> let me go through your remedies. i am over my time? >> you are fine. >> this is going to take a minute. i am happy to come back. i want to go through the remedies and if it is plausible, possible or at least that much. there are a number of remedies that mr. peterffy has suggested. one of them is the ability to submit orders to exchanges

should be restricted to brokers who are clearing members. i wonder if anyone wants to comment on that and also on the other suggestion that relates to this. it is that brokers who are not members of a clearing house are allowed to send orders directly to an exchange with the arrangement of a clearing member broker. they can give their permission. these 5000 brokers are not members of a clearing house. they can send orders directly. you would prohibit that. ok. there are two suggestions there. professoor angel, what do you think of those ideas? >> there are a lot of proposals to ban clearing members from putting orders into the exchange. there has been quite a

consolidation in the business. that would limit direct access to only the largest wall street firms. do we want to encourage that kind of consolidation in the industry? that is one thing to think about. also, i can see a clearing member actually providing naked access. i support the sec also proposal to get rid of naked access will grow course -- where brokers do not screen the orders first. when have to have the right risk controls in place so that the people responsible for the trade know what they are sending into the market. >> even if they are doing it through a clearing broker not being a clearing broker themselves? >> you need to have the risk controls in place. >> mr. narang, your comment on that suggestion. >> i would like to comment on that suggestion and also on mr.

peterffy's reputation. >> we build that the next production will be your reputation against his reputation. my time will be up. >> first of all, i fail to see the need for additional remedies. scenarior. peterffy's was based on a situation where sponsored access was in place. we are already at the stage where a ban on sponsored access has been posted and is due to go into effect within seven months. >> when you make that effective immediately? >> no, i would not. i do not fully endorse the ban on sponsored access. i can see the rationale behind it.

there are some little-known issues that are preferable -- that are peripheral to that that are anti-competitive. >> that is above the scope of this hearing. [laughter] >> if you want to keep us a few hours longer, i am happy to comment on it. as far as the comment about capital not needing to be there and risked checks not being applied, that is misleading. naked access means risk checks are not done on a free-trade the -- on a pre-trade basis. they are done on a post-trade basis. as soon as the trade happens, your buying power is reduced. >> the fact is that there are many brokers who provide naked access. there is nobody policing what

did they do any screening of orders or not. some of them do post-trade screening. many of them do not. >> i do not know of any who do not. that is a rather hypothetical statement. the point is that most -- post- trade risk checks are nearly universal and prevent people from exceeding their buying power. >> very quickly because i am over my time -- >> like all long-term investors, we get hung up listening to these discussions and scratch our heads and say, when we are talking about make it access, we are losing sight of the integrity of the markets. there have to be rules in place to prevent nefarious activity. if we think there is a chance that shutting the door can contain that, we should shut the

door today. there are more things to worry about other than naked and filtered access. >> mr. peterffy's scenario is based on an assumption that a clearing firm is not manage intraday risk. i would not say that every firm is perfect at man i -- at managing intraday risk. they manage it because it is what keeps them open day after day. i would assume there is a fair amount of disruption that would go with that. if a firm is mismanaging its risk, i would worry that the costs would outweigh the benefits. >> thank you. >> we have been joined by

senator ted kaufman. he is one of the great and persistent analysts of our market. thank you for joining us. >> he has made a major contribution. >he was an extraordinary contributed to our efforts. we know you are in that capability. >> thank you. i hope to be senator kaufman's successor in representing the people of delaware. he did a great job in ensuring the stability of our markets.

i will report back to him that i had the opportunity to hear one of the first cases of reputation all -- reputational arbitrage. markets are for capital formation and to protect investors. that is part of the purpose of transforming -- transparency and stability. to what extent are the markets no longer serving those functions and high frequency training is undermined those core goals of our markets? >> as i said, the overall function of the market is better for investors today that it was five years ago. competition has been enhanced and our ability to have more control of our orders has been enhanced. we have seen a reduction in

transaction costs. that has not been a universal experience. given the the big of his -- given the ubiquitous liquidity that is available, it is not clear that this market is serving the smaller companies as well as it could otherwise. i am confident that the market structure is better today. it can always be better. it will always be the case that it would be better. we are at not stick to the extent that we had liquidity and it does not cause undue dislocation on a given day or week. we do not believe the regulators have the appropriate tools to understand all the things that go on. we are pretty smart and we understand a lot of what go on. i am sure there are areas we cannot possibly understand today. i think there are nefarious activities and participants who

are out there and are taking advantage of investors. that is wrong. if you bring nothing to the party in terms of liquidity and efficiencies, you should not tax investors. there is no purpose for that. we have some concerns about high frequencies. would have concerns about any participant that is trying to manipulate the market. >> to follow-up questions that i might ask all of the member -- two of questions that i might ask all members of the panel. there is a consequence or an outcome of these strategies. what linkages do you see between the dynamics and the difficulties identified here in the market sectors that you do not participate in. what is the impact on inflation? it got a question, should traders who act like market

makers be subject to the rules that are associated with that trading? >> i do not think high-frequency trading is at the root of it. there are many other things in our economy. there are other markets structure changes we can talk about if you have a few more hours. the thing about high-frequency trading is that there are good in that computerized trading. they are using computers to do what they used to do manually. a lot of this is good for the market. a lot of high-frequency traders buy on the dip and sell on the rebound. one of the things that happened on may 6, the data feed were scrambled and the people said

they could not trust their data feeds. traders kept going, causing the market mechanism to fail. some high frequency traders are good. others help keep prices in line with each other. if coke get out of line with pepsi, they stepped in to make sure those stocks stay in the same correlate it passed. some think they do are good. we cannot say high-frequency trading is bad. there are some strategies that may be harmful to the market. the bulk of the things are helpful to the market. we need to pay attention to the smaller cap side of the market. we have collapsed transaction costs. we have a one-size-fits-all market mentality at the sec. i am convinced that small companies need a different market mechanism. having a market mechanism which a small spread is not necessarily the best market

mechanism. i think we need to pay attention to how small countries -- small companies come to market and how hospitable the market is to them. that is where future growth lies and where we will have a serious crisis on our hands. >> if there are other members of the panel would like to comment, please keep it within that one question. >> high-frequency traders are not good or bad. when they provide liquidity they are good. when they take liquidity, they are not so good. they should be simple to regulate. a high frequency trader provides liquidity. if they put in an offer that does not take off a bid or offer, that is a useful activity. they should be encouraged to do so. they should be incentivized to become market makers. that is what market makers do. when they are taking liquidity,

which is a front-running statistical relationship, the order should be slowed. i suggested 1/10 of a second. >> i would like to comment on your question earlier about the capital formation process and about the social utility of high frequency trading. many people have raised that issue. when an investor buys shares up a company in the open market, the proceeds go to the seller. they do not go to the company that the stock is written on. no capital is raised for the firm in question when an investor purchasing shares of that security. in other words, no capital formation happens in a secondary market. capital formation is the job of

the primary market. the secondary market encourages investors to participate in the primary market to provide liquidity. when you are pointing to desirable attributes for a secondary market to have, i believe there are few if any attributes that can trump liquidity. it is to support the capital raising function that occurs in the primary market. to the extent you believe that high-frequency trading is a picture of our market, you would have to argue that it serves just as much of a social value than investing in company shares in the secondary market. second of all, on the notion of obligations, my major concern there is that obligations put us on a slippery slope. i think our goal, or your goal

as policy makers, are to keep the good features of the markets as markets have evolved and address the bad ones. in terms of the bad features, we are talking about unbridled fragmentation. in terms of the good features, i do not think anyone disputes the fact that markets have gotten more liquid and spreads have gotten tighter and virtually no one disputes the notion that that has happened because the market making function has opened up to competition. tiered -tired -- two- system has been dismantled. take the example of may 6. there is a corner of our industry known as the wholesale industry. it executes the bulk of all

resale order flow. every firm in that industry shut down for business during the flash crash and dumped its shares onto the market. it shows you how effective obligations are. in 1987, during the great crash in october, black monday, market makers took heat for many months in the press after that for putting their hands down and refusing to take orders. even if you are obligated 99.9% of the time to provide liquidity, the time when you choose not to is exactly the moment when the market needs it most. there is no empirical evidence that such a thing will work. it is empirical evidence that such people who request obligations will request certain privileges that go along with them. >> well put. thank you.

>> i think i will try to convince my thoughts to this. there is always confusion of volume and liquidity in the market. there is more liquidity in the top 200 names in their span hysterically. i am not sure that trading at city group qualifies as liquidity. if we look at the market in terms of the different components of the market, there is the top part that has been functioning and has been served well by the current structure. we have done the analysis. the markets structure is serving the other parts of the market well. if there was value in market- making, and historical lee, market making has been a part of an efficient structure, no one wants to catch falling knives.

we have seen it time and time again. we are putting in circuit breakers and things that might be helpful in calamitous events that make liquidity more orderly and fair than it has been historically. >> thank you. >> there have been multi-part responses. i will align myself with the last bit that mr. cronin said. mandatory liquidity has not stepped in the way of moving trains. the trains with circuit breakers can only move so far. as policy makers continue to analyze the place of high frequency traders in the marketplace and analyze the tradeoff of liquidity and volatility, we have to look at

how productive the liquidity is and how can we put mandatory obligations backed into the marketplace. >> thank you to the panel. >> let me start the second round and then i will turn it over to chairman levin. it strikes me that one of the consistent themes has been that high frequency trading has provided some efficiency to the marketplace, some utility to the marketplace.

mr. narang, what is a fair summary of where you think we are? >> let me say that there exists high-frequency strategies that have less social utility than others. i did not know of any high- frequency strategies that are of use or can be hypothetically conceived of that are destabilizing to the market system. the reason i say that is a recognition of the fact that every high frequency trader out there controls very little capital. it would not even be medium- sized hedge funds. markets move because of buying or selling pressure. the buying or selling pressure

is roughly equal for a high- frequency trading firm. that is what makes them have high frequency. the high-frequency refers to their holdings. you cannot have a protracted or permanent effect on the stock's price. that rules out the possibility of destabilization barring some unknown accidental bug that occurs. your question focused more on intention now. from that perspective, and i would say high-frequency strategies run the gamut. i did not know that market should be policed based on some sort of objective assessment about how to value a participant is adding to the market. rules should be obeid.

there should be a level playing field. even though i am 8 high- frequency trader, there are on their -- unfair aspects of the market today that favor certain purchase as over others. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] >> the markets can be stable and unfair to buy his pants and grossly over compensated. mr. cronin, mr. peterffy, your quick comments. >> there is something else besides buy and sell. why are they quoting one stop for a thousand times in a second? there is activity that goes on that is trying to get

institutional or retail orders to react without taking the risk of taking an offer or hitting a number. >> the risk of destructive traits israel. there is no justification for continuing need access. we should stop it now. it costs nothing to stop it. only undercapitalized brokers support naked access. there is no to justification for continuing it. if i may just say, i have never heard of mr. narang before. as far as i know, his reputation is impeccable. >>

primary markets form capital. the primary market seem to be diminishing. is there a contradiction between this very successful secondary market, highly liquid, but the fact that it is not generating the kind of capital formation that could put people to work? for example, the real economy versus of the financial economy. the real economy is, do i have a job? do i have capital to spend?

could you briefly on that professor? >> sure. i call it the best of times and the worst of times, just like charles dickens. by almost any measurable definition of market quality, the market is very liquid, very cheap, it works very well. but, when you work in -- when you get into the smaller stocks, you have liquidity drying up. a lot of smaller companies are saying it is not worth it to access the capital markets. it could be the fact that the capital market is not recognizing the value of these enterprises. now, we need good secondary markets to provide exit for people who buy in the primary markets. we also need the ipo market to provide exit for the

entrepreneur is to build the companies. we really need to pay a lot of attention to what is going on here. there is no magic bullet, but it is a serious crisis. >> very quickly, i appreciate it. i think the committee would be well served to solicit the testimony of venture-capital less on this topic. i am confident that what they would -- ventura capitalists in this topic. a better exit for companies is to sell their firm to google or some other big company. in other words, economic solutions clearly have a lot more to do with the state of affairs and the health of the secondary market. the second thing i would say that has been shown, i believe the other exchanges across the

world are perhaps more competitive than the united states, because of regulations within the united states. i think that is something else that should be studied. >> thank you all very much for your excellent testimony and participation. chairman 11. >> thank you for all you have done. hearing has been very useful. it has been useful to us, and i hope also to the senate in its consideration. i have some additional questions that i am going to be asking of you. let me start and then go down the line. i think most of you if not all of you have said that the trading across multiple market venues has made it necessary for

the regulators to have information from those same venues in order to effectively regulate potentially manipulative trading. you cannot look at activity and a ton trading platform. to you agree with that? does anyone disagree with that? nope. ok, that will shorten that period -- that will shorten that .erio when it comes to the manipulation that exists between platforms, have you observed what appeared to be

manipulative as same-day trading between five platforms? >> -- between platforms? >> i have not, directly. i have heard anecdotally about things, but not so much between platforms. for existing -- for example, if you're talking about futures exchanges. >> you have heard anecdotally about such? >> yes. >> that stuff happens, there is no doubt. i was a treasury market major in the mid-1990's for a primary dealer. it was very popular in those days for traders to paint the screens, to show buying interest when in fact there were sellers. that is not a new practice, and

it has nothing to do with computers or automation. i would hasten to add that those strategies really are the domain of human beings. the cannot be modeled. it cannot be simulated. you cannot model the effect of what would happen. that is why i was a little bit disturbed when the example that every 1.2 occurred. it was blamed on high frequency traders -- everyone. -- everyone points to that occurred. it was blamed on high frequency traders. these things are psychological in nature and computers have no capacity to run them. that is on a psychological level. on a theoretical level, one

thing that is not very discussed is the fact it leaves a very concrete paper trail. the forensic analysis is readily to a ball when algorithm make traders -- readily doable when algorithm traders get involved in the market. it can be subpoenaed. it would be remarkably foolish for someone in tending to engage in that activity to do it with an algorithm. for all practical purposes, i know of no example that has been done thus far of manipulative activity being done by computer. >> my question was -- >> i have no doubt that it is

done but i have no concrete examples. >> said you have not observed this type of trading? >> know. -- no. >> we see this happening all the time, but i do not believe that should be such a great concern. we have much worse situations to deal with at this time. each broker must keep on record the identity of the person associated with each order, the extending orders. anything questionable can be very easily collected and correlate the water -- correlate the order to the person by name.

>> before i go back to the point, do you have a comment on my last question about whether you believe there is manipulative, same-day trading between platforms? >> there are two types of manipulation. there is the old-fashioned kind where you dump a big sell order into the market, trying to scare people. and that does not really depend on the platform. indeed, a lot of traders do not pay any attention to the platform. someone who is a very smart router could figure out the execution of that. there is a lot of manipulative trading that does not really pay attention to the platforms. now, if somebody is actually

trying to say, i am going to put this order into this exchange or that exchange because nobody will notice -- >> the regulators do not have such automatic access. >> actually, one group does consolidate the data. so, they could very quickly on an electronic blue sheet figure out who did what. they just cannot put together the order book to figure out the strategy, and that is why we need better data. >> that is why it takes time to do these studies, this analysis? >> that is one reason. the other reason is that the quality of data we get for the purposes of running surveillance is fragmented and incomplete. >> that is what i want to ask you about next. what is not included in the information?

>> a variety of things. at this point, we still have the equities markets being regulated somewhat. we are in a process of abrogating our current regulation of the market and adding in the new york stock exchange regulators markets. that will give us a much closer to complete picture of the equities trading, but options markets and options equities are still done in that way. soak and dollops -- so, consolidating is an unnecessary steps -- is a necessary step. customer information is certainly useful. i think especially if you are looking at it not from necessarily every customer, but certainly at the threshold that the fcc has proposed.

-- that the sec has proposed. i think the chairman alluded to the development of consolidated things that i cannot speak to, but one would hope that anything that came out of consolidation would not just be a merger of data but the inclusion of some level of more customer data. >> what about the stock exchanges? do you look at them? >> we do. >> do you get the same information from them? >> the way it currently works and the way it would work is a merger of the data, not just at the executed level, but actually exchange order books also. >> and the name of the customer would be useful as well? >> absolutely. >> while we completely support the idea of having the in

formation in the regulator's hands, obviously that is very sensitive and privileged information. if there were any leaks, that would have very bad consequences for our clients and shareholders. we would want to make sure that while information is being collected, and for the right purposes, that it is secure. we do not want wikileaks or anyone else to know our position is because that would be catastrophic. >> subject to that, would you consider irrelevant, that the regulators need access to that information? >> yes. >> there is currently an investigation into accounts held in other countries. >> it is an area that we are

quite concerned about. broker-dealers have customers based in the u.s. and abroad. sometimes those customers are just -- i do not want to say a cover, but sometimes a network of customers. investigations that we have to have stopped at a certain level, and that sometimes results in a referral to the sec. >> but you basically have difficulty investigating foreign accounts that you suspect of trading abuses, also because it cannot get client names. >> weaken the client names in the course of an investigation, -- we can get client names in the course of an investigation. they will provide that to us. our ability to compel financial information t