The US Securities and Exchange Commission (SEC) has proposed creating a ‘large trader reporting system’ that would assign a unique identification number to firms executing certain volumes in US equities, allowing the regulator to analyse their trading activity.
Under the proposal, the SEC would consider a firm or individual to be a ‘large trader’ if their transactions in exchange-listed securities equal or exceed two million shares or $20 million a day, or 20 million shares or $200 million a month.
Large traders would provide their unique ID number, known as a large trader identification number (LTID), to their broker-dealers, who would be required to maintain transaction records for each large trader and report the information to the SEC on request.
The data required would be largely similar to that required by the SEC under its Electronic Blue Sheets (EBS) system, which it uses to collect transaction data from broker-dealers. The only additional details a broker would need to report are the LTID and the time a transaction occurs. The SEC envisages that brokers would use the same technology for reporting this data that they use for the EBS system.
The proposal would require brokers to make transaction data available to the SEC on request the morning after the trade date, as well as monitor whether their clients meet the large trader threshold based on transactions completed at the brokers.
The SEC said the new system was designed to help the regulator identify the market participants engaged in substantial trading activity, obtain information needed to monitor more efficiently the impact of these firms’ trades on the markets and analyse large market participants’ trading activity.
The regulator added that the need to consider such monitoring has been heightened by the fact that large traders, including high-frequency traders, appear to be playing an increasingly prominent role in the securities markets. It noted that analyst estimates, while varied, typically put the level of high-frequency trading in the US equity markets at more than 50%.
“This rule is designed to strengthen our oversight of the markets and protect investors in the process,” said SEC chairman Mary Schapiro in a statement. “It would give us prompt access to trading information from large traders so we can better analyse the data and investigate potentially illegal trading activity.”
The market is likely to need clarification on a number of points. Larry Tabb, founder and CEO of consulting firm TABB Group, said in a webcast discussing the proposed rule that one question would be whether mutual funds, traditional buy-side houses and quant funds would be exempted. A further question, said Tabb, was whether firms running multiple funds but trading from a centralised dealing desk would need a single LTID for the desk or one for each fund.
“There are a lot of tactical challenges. Figuring out the practicalities of this rule will take some time” he said. However, he added that the SEC’s determination to improve transparency of trading made a new rule likely despite any technical challenges. “I’m not sure that just because it is impractical we are going to dodge this bullet,” he said.
Market participants will have 60 days after the proposal is entered into the Federal Register to submit comments on the large trader reporting system. After reviewing the comments, the SEC will consider what further action to take on the proposal.
Separately, the SEC has proposed implementing two investor protection measures in the US options market that currently exist in the equities market. Specifically, the proposal would amend rule 610 of Regulation NMS to prohibit options exchanges from unfairly impeding access to displayed quotations, and would limit the fees that an options exchange can charge investors and others wishing to access a quote on an exchange.
As with the large trader reporting system, market participants will be given 60 days to comment on the new options market proposals.