Missing: The Stock Exchange Buyers of Last Resort

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Nasdaq gradually eroded the market makers' obligations as the spread between bid and ask prices decreased. In 2007 it eliminated the 20-year-old requirement that market makers provide quotes that are "reasonably related" to the prevailing price. The thinking was that electronic trading firms pursuing different strategies would end up providing bid and offer prices for stocks through changing market conditions.

The SEC is in the "early stages of thinking about whether obligations on market makers akin to what used to exist might make sense," Schapiro told reporters on Sept. 7. The issue is "whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways in tough times," she said during a speech that day to the Economic Club of New York. The commission has introduced circuit breakers that pause trading in more than 1,300 securities if their price moves 10 percent in five minutes. One goal is to slow down trading when prices gyrate so investors can assess their reasons for buying and selling. It is also banning market makers from submitting quotes at unrealistically low prices, such as 1 cents, so prices won't plunge when buyers temporarily disappear.

The old system wasn't flawless. The Brady Commission Report on the October 1987 crash, when the Dow Jones industrial average fell 23 percent, found NYSE specialists and Nasdaq market makers didn't stem the downward slide of prices. Many Nasdaq market makers didn't answer their phones, ignoring customers, while overwhelmed NYSE specialists who had bought as sell orders flooded in later gave up or halted trading. It's not clear that any specialists or market makers can withstand a tsunami of selling. William O'Brien, chief executive officer of exchange operator Direct Edge, says once a rout has started, no trader will obey a regulation that forces him out of business. "If you burden any firm—I don't care how big or fast your computers are—if you have to buy when everyone is selling until you're bankrupt, even the biggest, fastest trading firm is not going to want to take on that obligation."

The bottom line: While increased competition in stock trading has lowered costs, it may have made the markets more vulnerable to rapid price moves.

Mehta is a reporter for Bloomberg News.

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