SEC adopts large-trader reporting system

WASHINGTON (Reuters) - U.S. securities regulators adopted rules on Tuesday that could help them investigate a future flash crash by better tracking the activities of large traders like banks, hedge funds and big proprietary trading companies.

The Securities and Exchange Commission first proposed its large-trader reporting system in April 2010. A brief period of volatile trading the following month, that became known as the "flash crash," highlighted the need for quicker and more detailed data.

The approval of the large trader reporting system in a 5-0 vote is the latest action by the SEC to revamp market structure. The SEC is trying to level the playing field for investors and make markets more transparent.

The agency's long to-do list still includes new rules for anonymous trading pools and flash orders that exchanges show to some traders before revealing them to public markets, as well as the creation of a consolidated audit trail.

The large trader rule "would significantly bolster our ability to oversee the U.S. securities markets," SEC Chairman Mary Schapiro said.

It will likely impact the brokerages of the largest banks such as Goldman Sachs and Bank of America as well as big hedge funds, investment companies and proprietary trading firms like Getco.

Each large trader would be assigned a unique identification number and would be required to provide that information to the trader's brokers.

Brokers would then need to keep track of that ID number, along with the timing of certain trades. That transaction data would be readily available to the SEC upon request, and could help in its effort to police for market manipulation and insider trading.

The proposed rule defines a large trader as a firm or individual whose trades equal or exceed 2 million shares or $20 million a day, or 20 million shares or $200 million during a month.

Certain kinds of transactions, like those associated with a gift, mergers and acquisitions, or court-ordered trades, would be excluded from the amount used to determine if a firm meets the definition of a large trader.

FLASH CRASH

The now infamous May 6, 2010, flash crash, in which the Dow Jones industrial average plunged some 700 points in just minutes before rebounding, exposed weaknesses in the regulatory system.

Among them was a lack of centralized and easy-to-access information, leaving the SEC at the mercy of the exchanges and even traders to get the trading data the agency needed to reconstruct what went wrong.

U.S. regulators, after months of study, concluded that a computer-driven sale worth $4.1 billion by a single trader in the futures market helped trigger the flash crash.

The Commodity Futures Trading Commission, which helped the SEC piece together the events of the flash crash, already has a large-trader reporting system in place to help it monitor the futures markets. But the CFTC gets its data regularly, while the SEC's new system will only collect data upon request.

About 300 brokers and 400 large traders are expected to be affected by the SEC's rules. Although the yet-to-be approved consolidated audit trail could cost the industry billions of dollars to implement, the SEC estimates the costs to implement the large trader reporting system are minimal.

In other actions on Tuesday, the SEC voted 5-0 to finalize a rule required by the Dodd-Frank financial oversight law that would strip out references to credit ratings from certain government regulations and forms.

That rule would strip rating references from the conditions that the SEC places on companies seeking to qualify for "short form registration" when offering securities for a public sale, and would impose new alternative criteria to determine if debt issuers, such as subsidiaries of public utility companies, can qualify for short-form registration.

The SEC also re-proposed and sought additional comments on a rule designed to promote greater oversight and quality of asset-backed securities after investors suffered tremendous losses during the financial crisis.

(Reporting by Sarah N. Lynch and Malathi Nayak; Editing by Tim Dobbyn and John Wallace)