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Exchanges want delay of SEC's naked access ban
June 21, 2011 / 4:28 PM / 6 years ago

Exchanges want delay of SEC's naked access ban

NEW YORK (Reuters) - Exchanges asked their regulator to delay, pending further clarification, new rules that would ban so-called “naked access” to markets, where brokers rent their IDs to unlicensed high-frequency traders trying to gain an edge of microseconds.

NYSE Euronext, Nasdaq OMX Group Inc, BATS Global Markets and Direct Edge asked that the ban be delayed until November 30, from July 14, according to a letter to the Securities and Exchange Commission, obtained by Reuters.

The new rule, adopted in the months after last year’s “flash crash,” would eliminate unfettered access to U.S. stock markets for unlicensed firms, and require brokers to protect against potential mishaps that could destabilize the high-speed electronic marketplace.

The exchanges said they wanted a clearer interpretation of the plan, listing some 35 questions mostly related to how broker dealers would perform the risk checks required by the rule, which was proposed in January last year and adopted in November.

“In making this request, the exchanges believe there are a number of interpretive issues arising under Rule 15c3-5 that should be resolved with respect to routing broker-dealers through further discussions with the Commission,” the June 20 letter said.

The four exchanges, noting they made the delay request on behalf of broker dealers, said they were also concerned the costs of maintaining the new risk checks “may be materially in excess” of the SEC’s initial estimates.

In November, the regulator said the plan would cost the brokerage industry around $100 million to implement and $100 million to maintain annually. Under the rule, brokers would have to implement controls to prevent the entry of orders that appear erroneous or exceed credit and capital thresholds.

Broker-dealers would also have to develop and maintain a system for reviewing the effectiveness of their risk management controls and for promptly addressing any issues.

More than a third of all U.S. stock-trading in late 2009 was done by firms that had “naked sponsored access” to markets, according to a report at the time by consultancy Aite Group.


In the letter, sent to SEC Chairman Mary Schapiro and others at the government agency, the exchanges asked an array of questions including what exactly is the “short period of time” in which brokers must measure potentially erroneous orders, which orders should be exempt, and how this can be automated.

The questions delved deep into the complicated nature of the stock market, where rules ensure that investors get the best possible price for stocks no matter where that bid or ask may be located. There are dozens of U.S. exchanges and alternative trading venues.

Does a “thorough due diligence” review “require brokers to request the policies and procedures of every customer to whom it provides market access?” the exchanges asked.

“If so, what standards are envisioned for evaluating such policies and procedures?”

An SEC spokesman on Tuesday said the agency had received requests for an extension, “but no decision has been made.”

High-frequency traders, whose computers can send thousands of buy and sell orders a second, pay brokers to get the quickest possible access to exchange servers and databases.

The May 6, 2010, flash crash, in which the Dow Jones industrial average plunged some 700 points in minutes before snapping back up, amplified criticism of such traders, although regulators later said they were not primarily to blame.

The impending naked access ban touches many corners of Wall Street, as well as the electronic firms scattered around the country that have come to dominate trading volumes.

It has prompted some high-frequency traders to convert into formal broker-dealers (BDs), while some existing brokers formed new BD units to secure additional licenses.

FTEN Inc, a risk surveillance provider acquired by Nasdaq late last year, as well as trade-clearing specialists Wedbush Inc and Penson Worldwide are among the companies centerstage in the debate over market access.

Reporting by Jonathan Spicer; editing by Andre Grenon, Maureen Bavdek and Bernard Orr

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