Firms Sound Off on SEC's Sponsored Access Proposal
Traders Magazine Online News, April 14, 2010
If the Securities and Exchange Commission's proposal for sponsored access to exchanges becomes a rule as written, then trading costs will likely rise for many market participants.
Dan Weingarten, Penson
This, at least, is the conclusion firms with large clearing operations reached in their comment letters to the SEC. These firms clear for clients--mainly broker-dealers--who employ high-frequency trading strategies.
At the heart of the rule is adding another pre-trade risk check for compliance at the clearing firms, which would slow down their clients' orders. Wedbush Securities and Penson Financial Services have said a rule requiring them to implement pre-trade risk checks on their orders should not apply to them, because their clients already perform such checks.
The comment period for the SEC's proposal on sponsored access ended in March. Exactly 34 letters were sent to the SEC between Jan. 26 and April 5, expressing their views on the practice. Most in the industry favor the proposal's position that unfiltered, or "naked," sponsored access should be abolished. Chances for its passage are high and that decision could come any day.
Still, those firms that provide naked access, such as Wedbush, Penson and Fortis Bank Nederland, were dead set against a rule. They said that such a proposal would add costs to their broker-dealer customers, and the markets at large.
The reason for such a rule in the first place is that the SEC and others in the industry fear that an unsupervised account without proper safeguards could blow up the market. The concern is that if a wrong keystroke is accidentally entered, or a high-frequency trading firm doesn't have the proper credit, trades won't clear.
Goldman Sachs, for example, supports the SEC's stance regarding the responsibility for risk checks. "We agree with the Commission that risk management controls should be under the control of the broker-dealer sponsoring such access," Goldman wrote in its March 30 comment letter.
The firm, however, is one of several in the bulge bracket expanding its filtered sponsored access business. It, as well as other B-Ds, could benefit from any measures that would take away from the models the clearing broker-dealers use.
For their part, Wedbush, Penson and Fortis provide their broker-dealer customers access to the exchanges without first performing pre-trade risk checks on their orders. This is the sticking point with regulators. The SEC wants broker-dealers and their clearing firms each to perform pre-trade risk checks, Penson and Wedbush have said.
But the clearing firms say they also provide valuable aggregation services. For these, the clearing firms bundle orders together and send them to an exchange in order to surpass volume thresholds and benefit from better pricing--which gets passed onto clients.
The SEC proposal would make it more difficult for these firms to reach the various volume breakpoints and would eliminate these savings. Forcing, say, Penson to add pre-trade risk checks--on top of the checks its broker-dealer customers already perform--would discourage the customer from using the clearing firm's market participant identifier to access the exchange, because it would take too long to trade, said Dan Weingarten, a co-director of global sales and marketing with Penson.
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