Washington, D.C., Nov. 3, 2010 — The Securities and Exchange Commission today voted unanimously to adopt a new rule to require brokers and dealers to have risk controls in place before providing their customers with access to the market.
The new rule focuses on a practice in which broker-dealers hand their customer a special pass to access the markets called a market participant identifier. The customer then gains direct access to the applicable exchange or alternative trading system (ATS), also known as “sponsored access.”
The rule approved today prohibits broker-dealers from providing customers with “unfiltered” or “naked” access to an exchange or ATS. It also requires brokers with market access — including those who sponsor customers’ access to an exchange or ATS — to put in place risk management controls and supervisory procedures to help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.
“I have previously likened unfiltered access to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied,” said SEC Chairman Mary L. Schapiro. “This rule requires that broker-dealers not only remain in the car, but also maintain control of it so we can all be assured the rules of the road will be observed before the car is ever put into drive.”
Through sponsored access — especially “unfiltered” or “naked” sponsored access arrangements — there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. Of particular concern is the quality of broker-dealer risk controls in “unfiltered” access arrangements. In some cases, the broker may be relying on assurances from its customer that the customer has appropriate risk controls in place.
The new rule is part of a larger effort by the SEC to help ensure that the markets are fair, transparent and efficient. Among other rules recently proposed by the Commission:
- Effectively prohibit all markets from displaying marketable flash orders.
- Generally require that information about an investor’s interest in buying or selling a stock be made publicly available, instead of just to a select group operating within a dark pool.
- Help identify and provide information on certain large traders.
- Promote fair and efficient access to listed options markets.
- Require the establishment of a consolidated audit trail system that would enable regulators to track information related to trading orders received and executed across the securities markets.
The new rule will be effective 60 days from the date of its publication in the Federal Register. Once effective, broker-dealers subject to the rule will have six months to comply with the requirements.