SEC bans ‘naked access’; aims to avert future ‘flash crash’ fiascos

“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.

19 Comments

  1. At some point people got it in their heads that the market is purely about liquidity. That we need to be able to get in and out in micro-seconds.

    What’s wrong with saying that if a stock is good enough to buy, it’s good enough to own. Why can’t we have a random freeze placed on shared, assigned by the trading system when you buy them (it might be an hour, it might be a week, it might be a year). When you buy the shares you just never know what lock-out period will be put on your particular shares. It would be totally random, and would force people to factor in the long-term view when making a trade.

  2. Steve516 … the May event involved one H3LL of a lot more than “a huge volume of AAPL being moved in a series of flash transactions”! AAPL was certainly affected, but so were most other stocks – and some a lot worse than AAPL! Acenture lost about 99% of its value in a matter of minutes, how I would have loved to have made a killing there. Used to work for those Windows-using Republicans before they moved my job off-shore. Still, all trades were called back – un-made, cancelled, recalled – when the entire market lost over 60% of its value. My $20K purchase (of $2M worth of the company) might have been minor, but it would have made MY day.

  3. My practice has been to order a Buy at a price, Good Till Cancel, and let it sit there until a) I buy or b) I cancel and switch to another stock. When I have bought, I calculate an acceptable sale price and place THAT order, Good Till Cancel, and let it sit there until a) it sells or b) I capture the dividend and can lower my asking price.
    My typical turn-around is a couple of weeks.
    I am NOT a “Day Trader”.
    It looks, though, like I am being tarred by the same brush!

  4. @ DLMeyer, see, I have no problem with grabbing $2m shares from someone for $20k.

    You were smart enough to buy at that price. Someone was stupid enough to sell.

    I really can’t believe they called back the sales. As much as I think there should be mechanisms in place to moderate manipulation (eliminating shorting, creating lock-in periods), I’m still a capitalist through and through.

    If someone was dumb enough to set up a computer automatically trade away their life savings for peanuts, so be it

  5. @ disp ident
    The point is that no person made a decision to sell those stocks. It was programmed in and the whole flash crash was created by a snowball effect.
    Sure a few people could cash in by buying stocks at a low price. But the economy as a whole would have tanked and the consequences for everyone as a whole would have been dire.
    We are still trying to recover from the last mess the financial sector created with the credit crunch mess. That was caused when short term financial gains were taken ahead of common sense.

    Activities like shorting, high-speed trading, even hedge funds are counterproductive for the general health of the economy because it allows people to make money from stocks falling in value. The idea was that it will create more liquidity in the market but in reality it has created instability because those who run those programs get greedy and manipulate the market for their own gains.

    I would prefer that these activities are scaled back or terminated. It has not created the liquidity that was expected. Instead it has just created a new way for brokers etc to manipulate the market.

  6. Speed traders are casino gamblers who eff with and try to game the system to make money- the exact opposite of people who want to invest for the long term.

    As to the Teabagger political comment- FYI- most ‘tea party candidates lost. Most Blue Dogs (Conservative Dems) lost, most Liberal Democrats were reelected. You also failed to take the Senate. Hope you teabaggers enjoyed your tantrum- now you have to do something.

  7. @ DogGone, but they consciously decided to create a sell order, and simply trusted that the price would be acceptable to them when it was executed.

    I didn’t lose a single Apple share in the whole episode.

    “Activities like shorting, high-speed trading, even hedge funds are counterproductive for the general health of the economy because it allows people to make money from stocks falling in value.”

    I’ll second that motion.

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