SEC Initiative - Brokers and dealers to have risk controls in place before providing their customers with access to the market: A Measure by the SEC

• Date: November 08, 2010
• Source: Admin

Direct access trading or naked / unfiltered access will soon be history with the new rule. This will affect many online traders and investors.

Customers of brokers/dealers will need a market participant identifier (special pass) to access the markets. This allows direct access to the exchange or alternative trading system (ATS), also called sponsored access.

Brokers are prohibited from allowing direct (unfiltered) access to an ATS or exchange. The rule also makes necessary risk management measures and administrative procedures to ensure compliance with regulatory requirements, enforce preset credit or capital thresholds, and prevent incorrect orders.

The new rule is synchronized with the primary intention of the SEC to help establish that markets are fair, transparent, and efficient.

 “I have previously likened unfiltered access to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied,” said SEC Chairman Mary L. Schapiro. “This rule requires that broker-dealers not only remain in the car, but also maintain control of it so we can all be assured the rules of the road will be observed before the car is ever put into drive.”

SEC claims that the current method of access may result in mistakes in orders by customers who are not necessarily subject to federal securities laws and self-regulatory organizations (as brokers themselves would be). This presents a way to wheedle or circumvent laws and regulations. Thus, the new rule will ensure that the broker actively manages access provided and controls the risks of erroneous, unlawful, or problematic trades.

In short, the SEC is trying to bridge the gaps in the system and stabilize online investing.

Naked / Unfiltered Direct Access Trading

Brokers currently have the ability to allow customers to use their market participant identifier code (MPID) to access the market directly, via a software platform, a trade network, such as a stock or futures exchange or a call market, ECN (electronic communication network) or other SEC-approved trading system, to make transactions or get information. This practice is called “naked” access or “unfiltered” access.

Source

http://www.sec.gov/news/press/2010/2010-210.htm

http://www.suite101.com/content/naked-direct-market-access-trading-say-goodbye-a189098