- Unfiltered DMA Access Going Away per SEC - Reiner Schubert
The United States Securities and Exchange Commission voted in early November 2010 to adopt Rule 15c3-5, which will halt "unfiltered," "naked," or "sponsored" direct market access trading by 2011, according to a press release issued by the SEC Wednesday, November 3, 2010. The new rule aims to bring greater standardization, accountability, and transparency to market behaviors and affects investors, traders and broker-dealers.
What Kinds of Transactions are Affected?
Online orders in which customers use brokers' market participant identifier codes (MPID) to get direct market access (DMA) to an exchange or an ATS (alternative trading system) are affected by Rule 15c3-5. This kind of "naked" access will no longer be allowed once the rule goes into effect.
Who is Affected by Rule 15c3-5?
The new rule stopping "unfiltered" market access will require certain brokers and dealers to make changes to the way they manage risk and supervise transactions. Such broker-dealers include those who subscribe to an alternative trading system, have membership in an exchange, or provide any non-broker-dealer access to trading securities through an ATS they operate.
Naturally, customers who used these direct market access providers to trade and invest will be affected by the new system of controls. In particular, certain high-frequency traders and institutions will no longer be able to place orders directly in a way that bypasses the broker's systems using an MPID.
Why is DMA Going Away?
By taking advantage of DMA, investors and traders who were not actual brokers, but their customers, were previously able to conduct high-speed transactions that were not always pre-screened.
Although a broker-dealer subject to the usual laws and regulations of the trade remained legally responsible for a customer's use of its MPID, this kind of "unfiltered" usage sometimes allowed individuals and financial entities to effectively slip through the cracks of regulated trading.
In the press release, SEC Chairman Mary L. Schapiro compared unfiltered market access to "giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied."
When Does SEC Rule 15c3-5 Eliminating "Naked" Access Trading Take Effect?
Within 60 days of its publication in the Federal Register, the rule that halts "unfiltered" sponsored access becomes effective. Six months after that date, brokers and dealers must be in compliance with the rule.
New SEC Rule to Get Rid of "Unfiltered" Trading
By tightening up the requirements for brokers and dealers in their management of the orders that fall under their auspices, the SEC expects to reduce the risk of erroneous orders, the number of transactions conducted without appropriate regulation, and the occasions of orders placed in excess of a preset monetary limit. In other words, the SEC wants to close up the cracks in the system and better assure the stability of online investing.
For more information about the history of this rule, see Naked Direct Market Access - Say Goodbye.
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