“The Securities and Exchange Commission voted on Wednesday to bar brokers from granting high-frequency traders unfiltered access to an exchange, a move aimed at imposing safeguards meant to prevent bad trades from disrupting the markets,” Jessica Holzer and Kristina Peterson report for The Wall Street Journal. “‘Naked access’ lets high-speed traders and others buy and sell stocks on exchanges using a broker’s computer code without requiring them to filter through the broker’s systems or undergo any pretrade checks.”
“Such trading arrangements have exploded with the growth of high-frequency trading firms, which rely on trading speed to make their money and don’t want to be bogged down by a broker’s controls. In some cases, brokers rely on assurances from traders that they have their own controls in place. Roughly 30% of market activity is currently conducted through naked access, said John Jacobs, director of operations at Lime Brokerage,” Holzer and Peterson report. “Mutual funds and other investors that don’t rely on trading speed to make their profits will be largely unaffected by the new rules, said Alison Crosthwait, director of global trading strategy at Instinet.”
Holzer and Peterson report, “The new requirements come amid increased concern at the SEC that a large errant trade could spread havoc in the markets. Since the May 6 “flash crash,” the agency has implemented mechanisms to prevent price swings in stocks. It is also undergoing an examination of stock-market rules. The SEC estimates that maintaining the enhanced controls will cost the broker-dealer industry $100 million annually, an SEC official said. The cost will be spread unevenly among the 1,300 brokerages, some of which may have to put in place new systems.”
Full article here.