The Securities and Exchange Commission Wednesday unanimously voted to ban ‘naked access’ to stock markets by unregistered entities.
By 5-0 vote, the federal regulator ordered brokers to apply risk controls to any orders initiated by customers who are borrowing a broker’s market participation identification code. The controls on financial exposure and on compliance with regulations must be executed before sending in each order.
The vote came in an open meeting Wednesday, 10 months after the ban was proposed by the SEC. The ban is designed to prevent “fat-finger” or other mistaken orders generated by humans or mathematically-driven systems that could disrupt markets.
Such risks were highlighted by the May 6 Flash Crash, where Dow Jones Industrial Average lost more than 600 points in a matter of minutes. The trigger, according to findings by staff of the SEC and Commodity Futures Trading Commission, was an attempt by a large market player – an authorized one – to place 75,000 contracts in E-mini futures, worth $4.1 billion, in a short period of time. Independent research from Instinet and other parties challenge whether that was a large enough amount of trading in a highly liquid instrument to disrupt markets. But it reinforced the need to supervise trades of all types, particularly those that did not go through risk controls before entering one of the nation’s proliferating number of exchanges and venues for trading stocks and derivatives.
“The potential impact of inappropriate trading has become more severe as our securities markets have become more automated, and high-speed trading more prevalent,” SEC Chairman Mary Schapiro said at today’s meeting, according to a Bloomberg report. “Additionally, as the events of May 6 demonstrated, the financial markets today are highly inter-connected, and an event in one market can rapidly spread throughout the financial system.”
Naked access accounts for about 38 percent of U.S. equities trading, according to Aite Group.
The rule containing the ban will take effect 60 days after it is published in the federal register. Brokers will have six months more to comply.