SEC Sees Too Much Risk in Broker-Dealer E-Trading

WASHINGTON (CN) - The Securities and Exchange Commission plans to require securities brokers and dealers who provide their customers with access to electronic trading to implement risk management procedures.

The procedures would be to insure that broker-dealers properly manage their customer's trades.

Broker-dealer customers may have access to electronic markets through "direct market access" or "sponsored access" arrangements, using the broker-dealer's market participant identifier. With "direct market access," the customer's orders flow through the broker-dealer's systems before passing into the markets. In "sponsored access" arrangements the customer's orders flow directly into the markets without first passing through the broker-dealer's systems. In either case, the broker-dealer is responsible for all trading activity that occurs under its market participant identifier.

The commission is concerned that these arrangements do not provide sufficient protection against illegal activity, accidental trades and breaches of credit or capital limits, and that these risks are a threat to the stability of securities markets.

The new rule proposed by the commission would require broker-dealers to adopt and record procedures that would limit the financial exposure of the broker or dealer from a customer's trade, and that would ensure compliance with all regulatory requirements related to market access.

Under the new rule, the required controls and procedures must prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, that fail to comply with any regulatory requirements that must be satisfied on a pre-order entry basis or that the broker-dealer or customer is restricted from trading.

In addition, the policies must restrict market access technology and systems to authorized persons, and assure that appropriate surveillance personnel receive immediate post-trade execution reports.

The SEC is seeking public input on the proposed rule.

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit