UPDATE 1-Global body urges tough rules for high-speed trade

* Direct access to markets needs better oversight - IOSCO

* Concern that errors or abuse could destabilize markets

* IOSCO recommendations mirror U.S. proposals

* High-frequency trading in the spotlight (Adds details, background, byline)

By Liana B. Baker and Jonathan Spicer

NEW YORK, Aug 13 (Reuters) - A global body of regulators proposed tougher guidelines to monitor high-speed traders with direct access to exchanges, addressing growing concern that such firms could imperil the marketplace.

The hedge funds, proprietary firms and others that have "direct electronic access" (DEA) to securities markets should be monitored for risky practices both before and after their trades are made, the International Organization of Securities Commissions (IOSCO) said in a report.

It also said brokerages that permit DEA are ultimately responsible for the impact DEA orders have on the marketplace, echoing muscular U.S. rules proposed early this year to safeguard markets from trading errors or abuse. [ID:nN13155676]

The concern with direct access is that an unsupervised rogue trader could destabilize public markets.

"(M)arkets, intermediaries and regulators must each play a role in addressing the potential risks posed by DEA," IOSCO said, adding that "regulators should retain the power to allow or prohibit any form of DEA..."

In direct access -- also called "sponsored" or "naked" access -- brokers approved to trade on an exchange rent their access badges to outside traders, who are then able to shave milliseconds off the time it takes to access markets.

The practice has spread from North America and Europe over the past decade as markets increasingly went electronic, and as algorithmic high-frequency trading played a more central role.

The U.S. stock market "flash crash" in May -- which rattled investors and exposed deep flaws in the high-speed marketplace -- intensified market reviews in the United States and Europe.

IOSCO suggested that brokers ensure their DEA clients meet minimum financial standards; that they identify the firms to regulators to bolster surveillance; and that markets that accept DEA be able to effectively limit trading if necessary.

The eight principles set forth in the IOSCO report are only guidelines for its member regulators. Direct access is now monitored by a patchwork of rules set independently by exchanges.

An estimated 38 percent of all U.S. stock trading is done through naked access, the fastest form of direct access, in which brokers do not screen orders en route to the market. U.S. Securities and Exchange Commission proposals would effectively ban this practice. (Reporting by Liana B. Baker and Jonathan Spicer; editing by John Wallace)