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September 1, 2011

SEC Says 'Large Is In'

By John D'Antona Jr.

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In an effort to help them reconstruct events when markets become disrupted, regulators have adopted a rule that will require the most active traders to code their tickets and brokers to monitor their activities.

SEC Chairman Mary Schapiro

The rule is viewed as a stopgap measure and lays the groundwork for a more comprehensive move toward instituting a consolidated audit trail, or CAT. Industry pros called the "large trader" rule a positive move, as it gives the Securities and Exchange Commission an ability to better monitor trading activity. The SEC approved the rule on July 26 by a 5-0 unanimous vote.

In contrast to the large trader rule, CAT would provide data points instantly when recalled. It was proposed for equities and options last year, but met significant resistance due to its multibillion-dollar price tag and the upgrades in technology it would require. While CAT would provide much more information, it will also take longer to implement-so "large trader" fills the bill for now, the SEC's thinking goes.

"In particular, the large trader regime is much more limited in terms of its scope and objectives," said SEC chairman Mary Schapiro. When compared to a consolidated audit for trading, she said, the large trader rule should entail much less change than the proposed CAT. "Further, the large trader rule would leverage existing systems to address the Commission's compelling near-term need for access to more information about large traders and their trading activities. It also would begin to improve the Commission's ability to analyze such information."

However, Schapiro said, her staff is working on recommendations for consideration with respect to a CAT and is hopeful that it will be able to move forward with a proposal in the very near term. "I expect that a consolidated audit trail plan will build on and complement today's large trader rule, and avoid unnecessary duplication or undue burden on market participants," she said.

Until CAT becomes a reality, large trader will have to suffice. According to one knowledgeable source, the backlog of rules mandated by the Dodd-Frank legislation has taken precedence over many other proposals due to the Dodd-Frank's statutory deadlines.

It seems CAT is one of these, and it was easier for the SEC to get large trader passed.

The large rule requires high-frequency and other large-volume traders to code their trade tickets with a unique identifier and time stamp for trades they execute. It targets both buyside and sellside shops doing significant volume. Trade information, if requested by regulators, would have to be available one day after a trade is completed.

The rule has two components. First, it would require large traders to register with the Commission through a new form, Form 13H. Second, it would impose record-keeping, reporting, and limited monitoring requirements on certain registered broker-dealers through whom large traders execute their transactions.