In a unanimous vote, the Securities Exchange Commission issued a ban on so-called “Naked Access” to stock markets. In a nutshell, the ban prohibits brokerage firms from providing “unfiltered” access to the stock market. The new rules are supposed to ensure brokers will play the role of gatekeeper between customers and the markets. Prior to this, brokers would often give customers “access keys” to the markets.
“I have previously likened unfiltered access to giving your car keys to a friend who doesn’t have a license and letting him drive unaccompanied,” said SEC Chairman Mary L. Schapiro. “This rule requires that broker-dealers not only remain in the car, but also maintain control of it so we can all be assured the rules of the road will be observed before the car is ever put into drive.”
Through sponsored access — especially “unfiltered” or “naked” sponsored access arrangements — there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. Of particular concern is the quality of broker-dealer risk controls in “unfiltered” access arrangements. In some cases, the broker may be relying on assurances from its customer that the customer has appropriate risk controls in place.
The new rule is part of a larger effort by the SEC to help ensure that the markets are fair, transparent and efficient. Among other rules recently proposed by the Commission:
The new rules were precipitated by the May 6, 2010 stock market flash. High Volume Trading firms often use algorithms to determine when and how they will trade stocks. Under certain conditions, these algorithms will cause automatic buying or selling, without human intervention. On Sept 30th, the SEC issued a white paper discussing the apparent causes of the flash crash. The new rules are thought to be a response to the May 6 flash crash, and an attempt to prevent a future flash crash.
However, the root of this change go much deeper. In 1998, the SEC first allowed electronic trading. Almost overnight, day trading firms popped up, and every Average Joe became a speculator. This increased speculation created the market pressure which lead to the burst of the “dot-com” bubble. Ever since then, the SEC has been crafting rules to further regulate electronic trading. This new barrier to public access to the markets is likely another attempt to prevent future stock market bubbles.
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