Exclusive Online Only ContentS.E.C. Homing In On Sponsored Access, Chairman Says
October 27, 2009
The Securities and Exchange Commission is preparing a proposal on how to deal with the practice of "sponsored access" to public markets.
The S.E.C.'s chairman, Mary L. Schapiro, told the Securities Industry and Financial Markets Association Tuesday that the agency is concerned by unfiltered access by "nonregistered entities" to public markets.
She likened the practice, where high-frequency traders and other customers use the market participant identification of a sponsoring brokers to trade directly on electronic exchanges, to giving "car keys to a friend who doesn't have a license and letting the friend drive unaccompanied."
(See "Sponsored Access: Should Trades Be Monitored Before They're Made?" Oct. 5, 2009)
No specific principles or possible regulation mechanisms were detailed by Schapiro, who spoke at the opening breakfast of the annual meeting of SIFMA, this year at the Marriott Marquis Hotel in New York.
Even though stocks on public markets on average are trading 50 percent up from their lows in March, Schapiro said in fact the agency's and the federal government's review of market operations has "much farther to go."
And that more S.E.C. proposals for reform are coming.
"With greater stability, we can begin choosing the issues rather than they choosing us,'' she said.
This year, the agency already has proposed an end to the practice of "flash orders,'' in which some electronic venues give professional traders sneak peeks at potential buy or sell orders, before moving them to other markets for fulfillment.
The agency last week also proposed a series of changes affecting dark pools of capital, where trades are executed without displaying identities of buyers or sellers or stocks to public markets until after a trade occurs. Among other items, the S.E.C. said last week that the "actionable" indications of interest used in these markets should be treated like quotes in public markets and subject to the same disclosure rules.
This week, at SIFMA's annual meeting, Schapiro said these practices also will draw scrutiny:
- Types of dark orders, although she did not specify which.
- Internalization, where a broker fulfills an order with the firm's own inventory of stock, instead of sending it to an exchange.
- Co-location, where some broker dealers place servers running trading algorithms in the same facility as exchanges' matching engines to get "significant advantages" in the speed of executing its orders.
- High-frequency trading, which now, she asserted, accounts for more than 50% of equity trading volume and whose effects need to be better understood.
- Asset-backed securities, where legislation is "likely needed" to bring laws up to date in dealing with compex instruments that Depression-era reforms were not designed to deal with.
She promised a "thoughtful, deliberate and comprehensive review of market structure."
But, "we are by no means out of the woods" on reforms, Schapiro said. And, "the pace will not slow any time soon."
