According to the report, "by many accounts, the agency is outmatched by the traders and market venues with technology that is remaking the trading world."
With no traders of their own on staff with "knowledge about cutting-edge strategies and how the markets operate," the SEC faces its fair share of doubters, especially after the near collapse of the investment banking industry and the failure to detect Bernard Madoff's massive fraud.
The agency currently leaves daily market surveillance to self-regulating bodies like the New York Stock Exchange.
That's left the SEC open to criticism that it's more about after-the-fact enforcement rather than identifying improper activity as it's happening.
But, as the report notes, Chairwoman Mary Schapiro, (above), has told Congress that efforts are underway increase surveillance and to recruit "additional professionals with expertise in securities trading, portfolio management, valuation, forensic accounting, information security, derivatives and synthetic products and risk management."
Some of the trading practices coming under SEC scrutiny are flash orders and so-called dark pools.
According to the report, flash orders give equities and options traders the chance to look at orders before they are routed to other markets. Dark pools are "automated trading venues in which orders are matched without displaying all quotes publicly."
The SEC is currently considering rules governing both practices.