From the September 01, 2011 issue of Futures Magazine • Subscribe!

SEC scrutinizing large traders

Under the microscope

The Securities and Exchange Commission (SEC) recently passed new rules giving itself more oversight over high-frequency trading firms and hedge funds under new reporting standards for the most active traders.

Under the new large-trader reporting standards, firms that buy and sell at least 2 million shares a day or meet other volume standards must adopt new tracking requirements. While the SEC began looking at the issue three weeks before the May 2010 "flash crash," that event highlighted the need for updated reporting standards when it took the agency weeks to piece together an audit trail.

The agency estimates a $35 million up-front cost to the industry and about $17 million a year to comply, with most of the cost coming down on broker-dealers.

SEC Chairman Mary Schapiro says the reports are needed. "The collection of this information is particularly important given the increasingly prominent role played by very active market participants including high-frequency traders," she said before the vote.

Within the industry, though, some like the Securities Industry and Financial Market Association (SIFMA) feel the SEC needs to coordinate efforts in creating an audit trail. "SIFMA believes that the SEC’s large-trader reporting proposal should be considered alongside the Commission’s proposal to create a Consolidated Audit Trail (CAT). The proposed large-trader reporting platform plus CAT will likely enhance the SEC’s and regulators’ capabilities to reconstruct market trading activity when needed in the future," the association said in a position letter.

Some others are questioning the value of the new report and what the SEC will do with the information once it has it. "Once the initial reports are filed and the brokers code their reports with the large-trader identification numbers, it is just one more report that the compliance departments in these organizations will need to make sure they file," says Jay Gould, partner at Pillsbury Winthrop Shaw Pittman LLP. "The real policy issue is with respect to what the SEC will do with the information. Will this information help prevent systemic risk or insider trading or will it sit on the SEC servers and be of limited or no use, like 13F reports?"

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