High-frequency traders will no longer be able to gain unfettered or “naked” access to public markets under a rule adopted by the US Securities and Exchange Commission.
The SEC voted unanimously yesterday to require brokerages to have rules in place to protect against potential mishaps from unlicensed traders when brokerages rent out their access to the markets.
The SEC also proposed a controversial plan that would allow it to reward whistleblowers if the information leads to a successful enforcement case.
The SEC’s decision to crack down on brokerages that rent out their market access to traders is the commission’s first rule designed to level the playing field between retail investing and high-frequency trading, which uses computer-driven algorithms to create and execute trades rapidly.
“This is part of our effort to address the risks associated with rapid electronic trading strategies that have become more prevalent in recent years,” SEC Chairman Mary Schapiro said at a public agency meeting.
Although the SEC had begun contemplating changes for the equity markets last year, the 6 May flash crash turned the spotlight on high-frequency traders and prompted calls from lawmakers to rein them in.
A government review of the brief market crash found that a large sale by a mutual fund helped cause the Dow Jones industrial average to plunge 700 points in minutes before sharply reversing course.
“Let’s be clear: Algo traders didn’t cause the flash crash. It’s a nice media headline but it’s not true,” Garry Jones, NYSE Euronext’s head of global derivatives, said at a conference in Chicago.
Under the SEC rule, brokerages will have to implement controls to prevent the entry of orders that appear erroneous or exceed credit and capital thresholds.
Broker-dealers will also have to develop and maintain a system for reviewing the effectiveness of their risk management controls.