Buy-side firms say clarifications are needed to a proposal by the Securities and Exchange Commission (SEC) to increase monitoring of firms deemed to large traders.
In April, the US regulator put out for comment a proposal that would assign a unique identification number to firms executing high volumes in US equities to enable more detailed reporting and analysis of trading activities. In its current draft, the rule would apply to firms trading two million shares or $20 million a day, or 20 million shares or $200 million a month.
The responsibility for identifying and reporting large traders would lie with broker-dealers, which would be required to maintain transaction records and report the previous day’s trades to the SEC.
A number of buy-side firms have responded favourably to the proposal on grounds that it would help tackle market abuse and expose the cause of market events such as the 6 May ‘flash crash’. But UK-based financial services group Prudential’s submission to the SEC raised concerns that multiple subsidiaries could be treated as a single entity.
The proposal currently defines a large trader as “any person that directly or indirectly…exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of any NMS security for or on behalf of such accounts, by or through one or more registered broker-dealers, in an aggregate amount equal to or greater than the identifying activity level”.
Prudential highlighted that this could mean that two subsidiaries of a parent company could be forced to report their trading activity in aggregate, despite operating independently, if their collective volumes exceeded the large trader threshold.
“The inclusion of non-large trader subsidiaries’ … trading data in a broker-dealer’s large trader records would obscure, through aggregation, the meaningful data of subsidiaries that are in fact large traders and impede the Commission’s ability to monitor the activity of genuine large traders,” wrote Lucy Williams, group compliance director, Prudential, in the firm’s submission.
Prudential suggests only subsidiaries that cross the large trader threshold independently should have to comply with the rule. Furthermore, the firm expressed concern that minority-owned subsidiaries could fall under the scope of the large trader rule and cause duplicative reporting and difficulties in obtaining data.
Under the current proposal, a parent company with a 25% stake in another entity would fall under the scope of the large trader scheme.
Prudential claims it may be difficult for a parent company to obtain trading data from minority-owned entities, especially in the case of private investment firms, and that the 25% threshold could cause duplicative reporting if, for example, four separate firms own a 25% stake in one other company.
T. Rowe Price, a US-based investment management firm with $419 billion assets under management, noted the potential conflict of interest that could arise by appointing broker-dealers to store client trading data.
“Any number of parties, including investment manager competitors such as hedge funds or high-frequency professional trading firms, would find this information invaluable,” read T. Rowe Price’s submission to the SEC. “Front running of trades based on this information could occur if such information is not well safeguarded. We encourage the commission to closely watch for any indications of issues in this area.”
The money manager also stressed the need for the reporting regime to be electronic, rather than paper-based, to relieve the associated time and cost burden.
But other market participants are more strongly opposed, including high-frequency traders.
In the recently published Q2 edition of The TRADE, Allen Zaydlin, CEO of InfoReach, a supplier of high-frequency trading technology, commented, “The greatest menace of the large trader reporting system is the obliteration of anonymity for traders and firms. It would give a government agency with admittedly little knowledge of high-frequency trading the unprecedented authority to demand proprietary trading data from participants who have no history of securities law violations.”
The comments received by the commission will be reviewed and taken into account before the SEC produces a draft recommendation that will be debated in an open meeting at a later date.