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SEC Must Look Beyond NYSE, Nasdaq for Cause of Market Crash: Today's Outrage

Adds SEC statement on meeting with exchange leaders about Thursday's stock market crash.

NEW YORK (TheStreet) -- Securities and Exchange Commission Chairman Mary Schapiro is looking in all the wrong places for answers to last week's historic market plunge.

Four days after the collapse, Schapiro met today with NYSE Euronext (NYX) CEO Duncan Niederauer, Nasdaq OMX (NDAQ) CEO Robert Greifeld and leaders of other exchanges. What a waste of time, judging by the SEC's post-meeting press release, which said only that "as a first step, the parties agreed on a structural framework, to be refined over the next day, for strengthening circuit breakers and handling erroneous trades."

More Transparency Isn't the Answer (Forbes)

Instead, Schapiro should be talking to executives at companies like Terra Nova Financial (TNFG) and other regulated broker-dealers that allow unregulated clients to piggyback on their access to the exchanges.

While Terra Nova says it's not aware of any link connecting it to unusual trading activity on the day of the so-called "flash crash," the brokerage should be called to explain how it manages risk related to the direct access to the exchanges that it provides clients.

This whole notion of leasing unfiltered access to the exchanges, known as "sponsored direct market access," is like letting the guards sell the keys to the vault. Who thought that was a good idea?

It's not that Terra Nova necessarily did anything wrong -- sponsored direct market access is currently allowed by regulators and Terra Nova is not alone in offering the service -- but this is clearly not a good idea. The practice makes a mess of the system and muddies the waters in terms of oversight.

So far, it doesn't seem like anyone has a clue about how trading spiraled out of control and caused the Dow Jones to drop nearly 1,000 points in a single day.

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