April 15, 2010

SEC Proposes Large Trader Reporting, ID System

WASHINGTON—The Securities and Exchange Commission on Wednesday voted 5-0 to propose new rules for large traders that would assign them unique identifiers and require them to report next-day transaction data when requested by regulators.

The rules are designed to give the SEC a better handle on high-frequency trading, in which trades are transacted in milliseconds and dispersed among many trading centers.

Next-day access to trading data could be used by the SEC to promptly reconstruct market activity and perform other trading analyses, according to a summary of the proposal. The data also could assist investigators in finding manipulative, abusive or otherwise-illegal trading activity.

Associated PressThe SEC’s Mary Schapiro testifies on Capitol Hill in Washington last year.



“The commission’s need to better monitor these entities is heightened by the fact that large traders, including high-frequency traders, appear to be playing an increasingly prominent role in the securities markets,” said SEC Chairman Mary Schapiro.

The SEC’s large trader tracking proposal is part of a broader effort to get a handle on lightning-speed, automated trading activities that have emerged in recent years. The agency also has proposed bans on displaying marketable flash orders and on broker-dealers giving customers unfiltered access to exchanges and alternative trading systems.

The large trader tracking proposal would allow the SEC to identify market participants engaged in substantial trading activity and give regulators the ability to obtain promptly the information they need to monitor the impact of those trades on the markets.

Under the proposed rule, the SEC would assign large traders a unique identifying number. The large traders then would be required to disclose to their broker-dealers their identifying number and highlight all of the accounts held by that broker-dealer through which the large trader trades, the SEC summary said.

Broker-dealers would be required to maintain and report data to the SEC largely in the same manner they currently do, with the addition of the unique trader identifier and transaction times.

A “large trader” would be defined as a firm or individual whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month.

The reporting requirement was designed to capture the largest individual traders, those engaged in 1/100th of 1% of average daily trading volume, according to SEC staff.

The SEC estimates that the rule would apply to the largest 400 market participants. The implementation costs would be minimal—$33 million to implement and another $17 million annually across the industry.

The agency is proposing that large traders self identify to regulators within three months after the rule is finalized. Broker-dealers would be required to comply within six months under the proposal.

The new large trader data the SEC anticipates receiving under the rule would complement the regulator’s project to create a consolidated audit trail of trading data. But the audit trail that SEC now is working on wouldn’t identify large traders, and that information would serve as an additional data point for investigators to use in surveying the marketplace.

The proposal was supported by all the SEC commissioners, although Commissioner Kathleen Casey cautioned that the proposed rule shouldn’t be viewed as the government’s judgment that large and high-frequency trading is harmful or dangerous, but as a tool to “gather as much empirical data as it can.”

The SEC also voted 5-0 to propose new rules to cap trading fees for customers of some options exchanges.

The proposal seeks to more closely align the actual cost of executing an options trade with the additional costs of accessing quotes on exchanges and the wide range of fees charged by different markets, according agency documents.

“In practice, the displayed quotation on an options exchange may not reflect the actual amount a person will pay to buy or sell the option,” SEC staff wrote in a statement.

“Instead, the person often incurs additional costs to conduct the transaction, including the cost of accessing the exchange’s quotation.”

The proposal addresses a long-simmering debate in the options industry over whether exchange fees should be assessed in a way that is similar to the U.S. stock market.

Ms. Schapiro said the proposed rule is designed to “ensure that the total cost of the transaction does not vary significantly from the displayed price” and “ensure greater transparency in the cost of accessing quoted prices.”

The new rules would target options markets running a so-called maker-taker pricing model, in which market makers receive rebate payments from the exchange to provide liquidity to the market, and customers are charged fees for trades that remove liquidity.

Those fees, according to the SEC, aren’t part of the displayed quote, and can make it harder for investors to figure the exact cost of doing business.

The proposed rule would cap such access fees at 30 cents per contract, and extend rules prohibiting exchanges from imposing “unfairly discriminatory terms” to cover options trading. The fee cap would apply to any fee based on the execution of an incoming order against an exchange’s best bid or offer.

—Jacob Bunge contributed to this article.


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