The illusion the SEC is guaranteeing the integrity of exchanges removes an incentive for the exchanges themselves to exercise diligence, lest they lose their customers. Then, when a scandal does occur, the SEC moves in to micromanage exchange rules, which often place costly burdens on exchanges without increasing safety. Worse still, established exchanges have used their SRO mechanisms to stifle competition. Exchanges like the New York Stock Exchange and Nasdaq Composite are not like farmers' markets that allow anyone to enter and trade whatever they want. They are more like private country clubs, with a closed membership.
Members make money by trading with other members for their clients.
Yet members can also legally make profits by operating outside of the exchanges, which poses a competitive threat to the exchanges themselves. The problem is that exchanges can use the threat of the discipline of SROs to deter such activities. After all, no member's books are perfect, and a fishing expedition or disciplinary inquiry is always costly and potentially embarrassing. But such rules would restrain competitors. Two developments suggest that the old system has outlived any usefulness it might have had.