Ted Kaufman - United States Senator for Delaware

S.E.C. Proposes Curbs on High-Speed Trading

Source: New York Times

By Cyrus Sanati

January 14, 2010

The Securities and Exchange Commission proposed a new rule on Wednesday that would bar brokers from allowing big clients to trade directly on their platforms with the exchanges, a practice known as unfiltered or naked sponsored access. The practice has been criticized by some market analysts, as it allows traders, especially high-frequency traders, to trade almost instantly at varying market centers without any associated checks on risk.

“Unfiltered access is similar to giving your car keys to a friend who doesn’t have a license and letting him drive unaccompanied,” Mary L. Schapiro, the S.E.C.’s chairwoman, said in a statement. “Today’s proposal would require that if a broker-dealer is going to loan his keys, he must not only remain in the car, but he must also see to it that the person driving observes the rules before the car is ever put into drive.”

Broker-dealers have allowed some big clients to gain access to their market participant identifier codes, allowing them to bypass the broker and trade directly with the exchange. Under this arrangement, known as direct market access or sponsored access, the client can sometimes place an order that flows directly into the markets without first passing through the broker’s systems, which means it is not seen by regulators.

Studies estimate that 38 percent of all trading is done through sponsored access. The fear is that a trader could disrupt trading by possibly entering erroneous orders as a result of a computer malfunction or human error, failing to comply with various regulatory requirements or breaching a credit or capital limit. Traders could also be gaining a millisecond advantage over the market, putting investors that do not have the special access at a disadvantage.

The move is a victory for Senator Ted KAUFMAN, Democrat of Delaware, who has been pushing the S.E.C. to take a closer look at fast-evolving world of electronic trading.

“I am very pleased that the commission is ready to ask serious questions and drill down beneath the standard-issue ‘provides liquidity’ defense of high-frequency trading,” Mr. KAUFMAN said in a statement. “The S.E.C. needs to understand and control technology and its benefits, not permit technology to operate without regulatory understanding or access to needed data, and in doing so outrace the regulators’ ability to ensure market fairness for long-term investors.”

The S.E.C. move comes a few months after James Brigagliano, an acting director of the S.E.C. division of trading and markets, told a Senate panel that sponsored access was a serious “front-burner” issue at the commission. The S.E.C. has moved to curb other types of electronic trading by banning so-called flash orders and shining more light on alternative trading platforms known as dark pools.

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