SEC official worried about "naked access"

NEW YORK (Reuters) - A top U.S. securities regulator said on Thursday that she was concerned about naked access, where brokers give high-frequency traders unfiltered access to public markets.

"I am worried that the proper controls are not being used effectively to make sure that problems aren't created by sponsored (naked) access," Securities and Exchange Commission Commissioner Elisse Walter told Reuters.

Walter is one of five commissioners who make decisions on federal securities rules.

She is the latest policymaker to weigh in on the practice, where traders gain unfettered access to exchanges by renting a brokerage's license. This allows traders to shave precious milliseconds from the time it takes to access markets.

SEC Chairman Mary Schapiro has also voiced concern and said her agency may consider curbs. She has directed her staff to craft rule proposals that would address the risk that naked access poses to exchanges.

Walter said she was "very concerned" about the practice. "I would think that what we would want to do is to make sure it happens responsibly," she said on the sidelines of a Practicing Law Institute conference.

Brokers, traders and exchanges have raised concerns that naked access, without proper controls, could pose a risk to the wider financial system. One of the fears is that a trader could make a minor mistake in order entry and wreak havoc on trading venues without a brokerage's risk management tools and controls.

An SEC official has said the agency is looking at whether risk controls should be applied before or after the trade is made. The SEC is expected to build upon a rule proposed by Nasdaq Stock Market parent Nasdaq OMX (NDAQ.O).

The exchange's rule would impose a marketwide standard requiring brokers to monitor their clients orders before they go to market.

Demand for more oversight has increased recently with lawmakers arguing that market practices such as naked access and rapid trades only benefit sophisticated investors.

(Editing by Leslie Gevirtz and Steve Orlofsky)