Brokers Scramble as Naked Access Ban Nears
Traders Magazine Online News, June 16, 2011
The Securities and Exchange Commission's new market access rule, set to go into effect on July 14, has brokers scrambling to comply with a set of regulations many feel are too confusing, and are also apt to be more expensive than originally anticipated.
New regulations associated with SEC Rule 15c3-5 will end the practice of brokers offering unfiltered or "naked" access to exchanges and alternative trading systems. Currently, brokers providing naked access will only monitor their clients' trades after the fact, or sometimes not at all.
Chris Lees
Both the Financial Information Forum and the Securities Industry and Financial Markets Association have asked the SEC to consider a phased-in implementation of the rule, delaying certain portions until November 30, though other key parts would still go into effect on July 14. The Commission is currently considering the request.
When the SEC adopted the rule in November, the agency said the costs associated with compliance would be justified by new protections on market integrity and efficiency. It estimated the industry would have to spend about $22 million, or an average of $16,000 per firm, on hardware and software to implement the rule. Ongoing compliance costs would be somewhat more, about $28.2 million, or $20,500 per broker dealer, annually, the SEC said.
But John Jacobs, director of operations for Lime Brokerage, said for firms used to providing naked access the costs could be quite higher than those predicted averages.
"Going from a post-trade environment to a pre-trade environment requires some pretty substantial investment," Jacobs said.
Lime is one of the brokerages that pushed for the new rule, so it already had controls in place, according to Jacobs. Firms offering naked access, however, tend to cater to high-frequency traders, and providing pre-trade controls while also maintaining low latency won't be cheap, he said.
(Lime was recently acquired by Wedbush, a competitor in the business of servicing HFTs. In the past, Wedbush has been cited as one of the major firms offering naked access.)
Chris Lees, a vice president at SunGard Global Trading, said the adjustments required of brokers are probably some of the most costly technical changes brokers have had to make in the past few years.
In addition to making sure that sponsored access clients are following procedures to prevent accidental or improper trades, under the new regulation brokers will also have to make sure clients comply with exchange rules.
If a sponsored access client violates a rule of one of the exchanges, the sponsoring broker would not only be liable for a fine from the exchange, it could also face enforcement action from the SEC, Lees said.
According to Michael O'Conor, director of management consulting for Jordan & Jordan, most everyone agrees that controlling access is important. However, it is still unclear how far brokers will have to go to comply with the new rule.
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