Here is a quote from the rule: “In all cases, however, whether the broker-dealer is trading for its own account, is trading for customers through more traditionally intermediated brokerage arrangements, or is allowing customers direct market access or sponsored access, the broker-dealer with market access is legally responsible for all trading activity that occurs under its MPID.”
The rule creates a number of thorny issues that broker-dealers need to address. For one, the rule requires broker-dealers to establish controls and supervisory procedures that ensure that the orders don’t exceed that customer’s credit and capital thresholds. These thresholds need to be applied across multiple markets and multiple asset classes.
The asset classes included are equities, equity options, ETFs, debt securities and security-based swaps. Since most firms trade these instruments on multiple trading platforms and provide access to the markets through multiple silos, the rule will create an integration requirement that many brokers have not yet fully understood.
The rule requires pre-trade risk controls to be applied in order to prevent the entry of any order that exceeds the credit or capital thresholds or that does not meet other compliance obligations.
While most order management systems already apply certain risk checks to prevent erroneous orders and ensure compliance with some regulatory requirements, they generally do not have an integrated view of the client’s overall position, exposure, or credit and capital thresholds. So the broker will need to aggregate positions and open order exposure across the trading platforms and across the affected asset classes.
In addition, the broker-dealer must have direct and exclusive control of the pre-trade risk controls that enable the broker-dealer to prevent non-compliant orders from being entered. There are some exceptions to this, but it will directly affect brokers who allow clients to trade using their own black boxes or third party trading platforms.
Click here to read the entire rule.
Click here to an FAQ published by FTEN and NASDAQ OMX.
We’ll be spotlighting MAR in an upcoming Trendspotters episode. Stay tuned.
Disclaimer: I’m not an attorney or a compliance expert and this post is strictly my opinion and should not be construed as legal or compliance advice. I wrote this post strictly to bring your attention to some of the issues, but this is certainly not an exhaustive list of areas financial institutions should consider when looking at MAR compliance. Nothing on this blog should be construed as the practice of law, legal advice, compliance advice or investment advice.
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6 Comments to "Market Access Rule – It’s Not Just About Naked Access":
ltabb
08 March 2011
I agree with Candice, this is way larger than most folks think. Anyone that provides any market access needs to comply. That said - most folks do have some sort of risk checking between the client hitting enter and the order being submitted to the market for all but the lowest of latency gateways. But that may not be enough to comply with the rule. For anyone that provides electronic access - its worth a read and a discussion with your compliance team.
Comments (312)
riati
09 March 2011
Also agree. The concern here goes beyond the simple provision of pre-trade risk. Many vendors will offer effective 3rd party solutions. But how will this effect latency? Will the added 'hop' required to check risk change the game for some HFT shops? How will this influence HFT Clearing firms, some of which base their value proposition on low cost market access and clearing fees, who will now need to spend to offer compliant solutions to their clients? It could force them to raise their prices enough to damage their differentiation from their competitors. There is more to this than meets our first glance.
Comments (51)
candyce
09 March 2011
Thanks for your comments. Another thing that will be affected by this rule is the tiering and aggregation model. Firms that are using rebates as part of their business model will be affected. It's unclear at this point how those exchange and ECN models will change to accommodate the new rules. Larry or Bob - can you comment on this?
Comments (28)
ltabb
09 March 2011
There will be forces pushing in two diametrically opposed directions here. First is the aggregation model. Exchanges give better prices to those that send them more order flow. So the top tier guys will get the best economics. That puts pressure on folks with the lowest prices (that take outside business) to implement a risk management scheme that is SEC compliant. However, it may be faster to access the markets directly by becoming a self-clearing exchange member. In that way you only need to have your internal risk checks instead of having your one risk checks and then routing the order to the broker who then needs to do a subsequent risk check. Now while it may be faster to link to the markets directly as a clearing broker, the question remains that depending upon your volume, you may not reach the top or even the second their of orderflow. that means that while you may save on latency, you may in the end pay a lot more money to the exchange because you fail to get into an economic pricing tier. So it is either become a self clearing firm and pay more, or pay less but suffer the latency tax of a second risk check. From the way I understand it, the latency tax is lower than the economics gained from being lower in the price tier. now that said - the exchanges could and may very will re-shift those price tiers and if they make significant changes to that - it may be a whole different game.
Comments (312)
candyce
09 March 2011
Becoming a self-clearing exchange member adds a lot of additional costs and burdens over and above the necessity of adding the risk management layer and missing out on tiered rebates based on volume, so I agree with Larry that the latency tax of obtaining pre-trade risk checks from the member broker may be the better option for many firms. The exchanges need the volume provided by the HFT players, so I'm sure they'll figure out how to adjust their models to retain that order flow.
Comments (28)
candyce
28 June 2011
In case you missed it, the SEC granted a limited extension to the Market Access Rule implementation. The extension applies to all requirements associated with fixed income and to the requirement to conduct pre-trade risk checks based on buying power/committed capital across markets. Other requirements such as the need to prevent fat finger errors has not been delayed. The compliance date for all other provisions remains July 14, 2011. For more information: www.sec.gov/rules/final/2011/34-64748.pdf http://www.reuters.com/article/2011/06/27/us-sec-marketaccess-idUSTRE75Q6S220110627
Comments (28)