US stock exchange operators have written to the Securities and Exchange Commission (SEC) to request a delay to the introduction of new rules governing direct access until 30 November 2011.
The letter from the four largest US stock exchanges –Nasdaq OMX, NYSE Euronext, BATS Exchange and Direct Edge – noted that the rule presents interpretive issues “that should be resolved with respect to routing broker-dealers through further discussions with the Commission”.
The new rule, which is due to come into force on 14 July, prevents broker-dealers from offering clients ”naked' access to markets, i.e. using a broker's infrastructure to trade directly on a trading venue without pre-trade risk controls. To facilitate access to trading venues, brokers will be required to establish, document and maintain a system of risk management controls and supervisory procedures to manage the risks associated to market access.
Exchange concerns relate primarily to their obligation to route orders to other markets if they display a better price, a regulatory obligation under Reg NMS. In its current form, the rule would require a second set of risk checks to be applied by the broking subsidiaries of exchanges – used specifically to route orders on to other trading venues – despite the fact that similar checks would have already been conducted before the trade was initiated.
Some brokers are also thought to be concerned with the complexities and costs involved in calculating a consolidated view of a client's credit exposure across different trading channels.
The SEC originally moved to ban naked access in January 2010. The 6 May ”flash crash', where an erroneous algorithmic order deployed directly by a buy-side firm caused mayhem in US markets, accelerated the debate on naked access and led to new rules being passed by the SEC in November 2010.
“Unfiltered access is similar to giving your car keys to a friend who doesn’t have a licence and letting him drive unaccompanied,” said SEC chairman Mary Schapiro. “The proposal would require that if a broker-dealer is going to loan his keys, he must not only remain in the car, but he must also see to it that the person driving observes the rules before the car is ever put into drive.”