The abuses described by the SEC go to the heart of the NYSE's specialist system. By trading ahead of customers, specialists were said to have siphoned off $155 million from investors over the past three years. Worse, the exchange didn't police its specialist firms, ignored repeated violations, and fined offenders so lightly that the penalties were seen as a minor cost of doing business. In the '90s, similar kinds of corruption led to the separation of regulatory operations from the NASDAQ market. Nothing short of that is needed at the NYSE.
Indeed, tight regulation may reveal that the specialist system is untenable and force the spread of electronic trading. So systemic is the corruption at the NYSE that it brings into question whether specialist firms could ever be profitable without it. It's time to find out.