Concerns over the ”large trader’ rule may be exaggerated, according to a new report by US research consultancy Woodbine Associates, which describes it as “well-intentioned and appropriate” and points to its potential to help “instil confidence” and integrity in the marketplace.
The large trader rule, approved by US regulator the Securities and Exchange Commission (SEC) in July, aims to give regulators better oversight of the market participants with the largest trading volumes. Under the rule, a large trader is defined as a person or firm whose transactions in exchange-listed securities equals or exceeds two million shares or US$20 million during any calendar day or 20 million shares or US$200 million during any calendar month.
Entities that meet the threshold will be assigned a unique ID number to give to their broker-dealers, which will be required to maintain transaction records for each large trader and report that information to the SEC upon request. Firms that do not use a third-party broker to access markets will be required to keep their own records.
The large trader rule has been criticised for making excessive demands on traders to reveal proprietary information that could undermine profitability. Market participants have also worried that the new regime will lead to a focus on data at the expense of behaviour and have questioned the ability of the SEC to handle the data volumes involved.
Yet the Woodbine states that the danger is “far short” of the dire consequences some market participants have predicted. Instead, it suggests that the more comprehensive data set yielded by the large trader rule would significantly enhance the SEC’s ability to curtail trading abuses and explain market aberrations.
“This is for the good of the market,” Michael Kurzrok, director, equities at Woodbine, told theTRADEnews.com. “Any form of regulatory intervention is going to face objections from somewhere – people don’t like having to disclose information, nor do they enjoy the extra work. But the reality is, this is a lot less demanding than it might have been.”
Kurzrok points out that the rule isn’t strictly a new imposition on the market since it draws on two existing rules: first, a rule which requires brokers to electronically submit information on proprietary and customer trading to the SEC; and second, the existing large trader reporting system, which allows the SEC to collect information on the trading activity of large traders to assist in enforcing federal securities laws. The main difference between the new rule and the previous regulations concerns the reporting of transaction times, registration and reporting of large trader activity with a designated identification tag.
The SEC has estimated the development of a real-time large trader reporting system will cost between US$2-4 billion, but Woodbine suggests that a T+1 approach would be much cheaper and more acceptable in the current economic climate.
The firm says the need for greater oversight was exposed by the SEC’s response to the ”flash crash’ of May 2010, which took eight months to produce and was widely considered unsatisfactory by market participants.
“The large trader rules makes a lot of sense in that the greater transparency of the markets afforded to the SEC for regulatory purposes should go a long way toward ending much speculation as to the impact high-volume traders have on the market,” says the report.
The SEC is currently reviewing several other options aimed at improving the stability of the US’s securities markets infrastructure. SEC chairman Mary Schapiro suggested in March 2011 that compliance with automation review policies (ARPs) could be made obligatory. ARPs were introduced in the aftermath of ”Black Monday’ in 1987, in which investors overwhelmed Wall Street’s existing automated systems.”
The ARPs set out expectations that market participants would acquire and test the systems necessary to run their operations and that these would be reviewed annually. They also told that the SEC should be alerted to any problems or changes. As these were policy statements, not rules, compliance was not a binding requirement, but that may now change.
Schapiro’s comments followed the ”Recommendations regarding regulatory responses to the market events of May 6 2010′ issued on 18 February by the Joint Commodity and Futures Trading Commission (CFTC) – SEC Advisory Committee on Emerging Regulatory Issues, which recommended that regulators consider 14 changes to strengthen market infrastructure, including the introduction of the ”trade-at’ rule, first proposed by the SEC, would require dark pool operators to either offer significant price improvement or route orders to lit venues.
In addition, the large trader system could be complemented with a consolidated audit trail by Q3 this year, which 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.