Regulation

Large trader system only the beginning – SEC

The Securities and Exchange Commission (SEC), the US financial markets regulator, has established a rule that sets out large trader reporting requirements, but warned that more supervision is needed.

The new rule requires large traders, defined as a person or firm whose transactions in exchange-listed securities equal or exceed two million shares or US$20 million during any calendar day, or 20 million shares or US$200 million during any calendar month, to identify themselves to the SEC.

The regulator will then assign each trader a unique identification number. Large traders will provide this number to their broker-dealers, who will be required to maintain transaction records for each large trader and report that information to the SEC upon request.

Commissioner Elisse Walter said that the rule would help the SEC in analysing the impact of large traders activities on the market and the interests of long-term investors, but warned it was not a “cure-all” for cross-market supervision.

“As order flow often moves from one marketplace to another, the SEC is not adequately equipped with the surveillance capabilities to gather and analyse cross-market data in a timely manner,” she said. “In my view, a consolidated audit trail, along with the large trader reporting requirements, would begin to close this gap and enhance the SEC's ability to perform its market monitoring responsibilities.”

The large trader regime was proposed on 23 April 2010 to help the SEC assess the effect that large traders had on the securities markets, reconstruct trading activity following periods of unusual market volatility, and analyse significant market events for regulatory purposes as well as assisting with detection of market abuse. The subsequent ”flash crash' on 6 May, which saw the Dow Jones Industrial Average fall and 1,000 points in the space of 20 minutes and then recover, lent support to the proposal.

The consolidated audit trail, proposed on 27 May 2010, would require exchanges and their members to send quote and order information to a newly-created central repository, as close to real-time as possible, for all National Market System stocks and listed options.

Feedback to the proposal from buy-side firms was broadly positive, although UK asset manager Prudential voiced caution over the requirement for subsidiaries to report their trading in aggregate as part of a parent company's figures as it might obscure genuine large trader data.

Other market participants have voiced concern over the plan. Allen Zaydlin, CEO of InfoReach, a high-frequency trading technology provider, said, “The greatest menace of the large trader reporting system is the obliteration of anonymity for traders and firms.”

“May 6 dramatically demonstrated the need to enhance the SEC's ability to quickly and accurately analyse market events. The large trader reporting rule will significantly bolster our ability to oversee the US securities markets in a time when trades can be transacted in milliseconds or faster,” said SEC chairman Mary Schapiro.

The new rule will be effective in late September, 60 days after its publication in the Federal Register.