In one of its first regulatory moves since the May 6 Flash Crash, the Securities and Exchange Commission has banned "naked access," which allows high-frequency traders (HFTs) to use a broker's computer code to access markets.
Why is this important? HFTs use brokers to access exchanges, but brokers must risk-check the HFT — they must, for example, make sure they are authorized to make the trades, a process that takes a fraction of a second. Naked access allows the HFT to use the broker's "membership card" to get to the exchange a fraction of a second earlier.
The downside: it's not clear who exactly is making the trades, since the HFT is using the brokers "pass" to access the markets, and checks to make sure that trades are meeting risk control parameters set by the exchanges are not being made.
Now the SEC has banned this practice. Brokerage firms will have to more closely monitor their trading activities and develop systems for monitoring the effectiveness of their risk management controls.
See Full Story, with Comments by SEC Chairman Mary Schapiro.
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