From the May 01, 2010 issue of Futures Magazine • Subscribe!

SEC proposes large trader reporting

One of the most popular tools for futures traders may soon be available in some form to securities traders as the Securities and Exchange Commission (SEC), in April, proposed the creation of a large trader reporting system to enhance its ability to collect and analyze trading activity.

Under the proposal, a "large trader" would be defined as a firm or individual who trades exchange-listed securities equal to or greater than two million shares or $20 million on any day, or 20 million shares or $200 million any calendar month. "This rule is designed to strengthen our oversight of the markets and protect investors," said SEC Chairman Mary L. Schapiro in a statement.

Jay Gould, head of the investment fund practice for Pillsbury Winthrop Shaw Pittman LLP, says the proposal would have a significant impact on hedge funds, especially activist, long/short equity and
event-driven strategies. “The implications are for people who are trying to build up a position in a company. They are going to have to do it quietly over a longer period of time,” Gould says.

While some funds will fight the proposal, he expects this to pass in some form in as soon as six months. “Right now is a very difficult time for people working in the public securities markets to make effective arguments against transparency. The big buzz words right now are transparency and liquidity, so if you are arguing against transparency or liquidity you have an uphill battle,” Gould adds.

While the proposal may be a regulatory headache to some, it could be an opportunity to others. There are numerous strategies that trade off of SEC reports and this would be another tool. “There are certain multi-strategy funds that look at what other people do and incorporate that into a program. Anytime you have information out there and there is a possibility of arbitraging that information, then you have either a new strategy or you are able to tinker with an existing strategy,” Gould says.

He adds that a lot of important details like how often traders will be required to report and how soon that information will be made public will need to be worked out in the comment process.

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