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July 6, 2009

Big Banks at Odds with Regulators Over Sponsored Access

By Peter Chapman

John Malitzis, an executive vice president for market surveillance at NYSE Regulation, echoed Gira. "We've had instances where orders come into the exchange that can wreak havoc on a particular transaction," he said. "We call the firm and they have no idea where the order is coming from. That is a basic, fundamental control issue."

The SEC is pressing for action. James Brigagliano, co-acting director of the SEC's Division of Trading and Markets, noted at the SIFMA conference that a variety of risks exist when trading firms have "unfiltered access" to the markets. "These risks can affect many participants in the market structure, including the trader's broker, the exchanges and the clearing entities," he said. "Ultimately, the risks can affect the integrity of the market structure itself."

In contrast, the bulge attorneys stressed they have everything under control. They argued that they did not extend sponsored access to firms they did not trust. "You have to do your due diligence of the counterparty," BofA's Mullen said. "This is where I think the debate should center--what constitutes good, quality due diligence."

Goldman's Kelton echoed Mullen. "You are being selective with the clients you are going to let have this," she said. "So you are kicking the tires. You are probably dealing with very established companies."

The electronic trading departments of the big banks are some of the largest providers of sponsored access. In May, the SEC convened a meeting with technology and legal representatives from some of the biggest including Goldman, Morgan Stanley, Deutsche Bank, Bank of America/Merrill, Barclays Capital and Citi.

Nasdaq's proposal is with the SEC.


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