US SEC mulls plans to safeguard naked market access

January 12, 2010

By Rachelle Younglai

WASHINGTON, Jan 12 (Reuters) – U.S. securities regulators are mulling a proposal that would require more supervision of unlicensed traders who gain unfettered access to public markets, two people familiar with the plan said on Tuesday.

Regulators are considering a proposal that would require brokerages that rent out their access to the markets to have rules in place to protect the markets against potential mishaps from unlicensed traders, the two people said.

The practice known as “naked” access or “sponsored” access, is when brokerages that have been approved to trade on an exchange rent their access to traders who are then able to shave milliseconds from the time it takes to access the markets.

It has some lawmakers and U.S. Securities and Exchange Commission officials concerned. SEC Chairman Mary Schapiro has likened it to “giving your car keys to a friend who doesn’t have a license and letting him drive unaccompanied.”

The SEC meets on Wednesday to decide on a plan to increase oversight of naked access and figure out whether new rules are needed to curb recent market developments like high-frequency trading.

Naked access is now monitored by a patchwork of rules maintained by the exchanges, brokers, and trading firms.

The proposal would require broker dealers to implement financial risk controls and supervisory controls, said the sources. The sources requested anonymity because the proposal is in flux and has not been made public.

The broker dealers will have to have rules in place to make sure that traders, for example, do not place an erroneous order that could wreak havoc on the exchange, said the sources.

They would also have procedures to ensure that unlicensed traders comply with credit and capital thresholds, one of the sources said. For example, a trader would not be able to make a certain trade unless that trader had enough capital in the bank to execute the trade.

An SEC spokesman declined to discuss the proposal. (Reporting by Rachelle Younglai; Editing by Tim Dobbyn) ((; +1 202 898 8411))

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