Research firm TABB Group has said that the market access rule, Rule 15c3-5, being introduced in the US on 14 July, is likely to increase sell-side spending on pre-trade risk management systems by 12% until 2014.
The rule is being introduced by market regulator the Securities and Exchange Commission (SEC) to prevent brokers' clients from accessing trading venues without sufficient pre-trade checks.
Under the rule, which was originally proposed in January 2010, brokers will be required to establish, document and maintain a system of risk management controls and supervisory procedures to manage market access by clients that trade directly on the market using their infrastructure.
According to a TABB report, ‘The market access rule: Blueprint for the new regime’, spending on pre-trade risk management technology is likely to rise from US$220 million in 2011 to US$292 million in 2014, as brokers seek to offer checks to clients that provide minimal disruption to their trading operations.
Unfiltered, or ”naked' access is of most value to traders that trade at low latency, such as high-frequency trading firms, as it provides the minimum friction for an order to reach a market. Introducing pre-trade risk management checks will increase an order's latency, making the speed at which checks can be conducted a competitive issue for brokers courting HFT flow.
Miranda Mizen, principal at TABB Group and author of the report, notes that HFT firms will now have to weigh up trading through brokers with the least latency in pre-trade risk controls against the potential that the firms do not offer the best volume discounts, have the broadest market access or the most reliable systems. Proprietary HFT firms account for 22% of daily US equity trading volume according to TABB estimates.
Alternatively those participants that require direct market access may themselves become a broker, but will have to calculate whether the loss of execution and clearing discounts that they benefit from as a client will outweigh the latency advantages.
Concern over naked access was heightened following the 6 May ”flash crash', in which the Dow Jones industrial average fell by almost 1,000 points inside of a 20 minute period before recovering.
Combined with the introduction of market-wide single-stock circuit breakers, the new rule is intended to prevent a recurrence of the flash crash. The circuit breaker regime will be revised before the end of the year to operate on a limit up/limit down basis allowing trading on affected stocks to continue within a restricted price band.
The SEC postponed, the implementation of controls that ensure orders sent through brokers' systems do not exceed pre-set credit or capital thresholds and the ban on naked access for fixed income securities until 30 November, after market participants requested more time to comply with the rules