Knowing Large Securities Market Participants New Target of SEC

Jack Humphrey, Regulatory journalist
July 28, 2011 /

The Securities and Exchange Commission has pushed the adoption of a new rule establishing large trader reporting requirements to enhance the agency’s ability to identify large securities market participants, collect information on their trading, and analyze their trading activity.

The proposals come shortly after the SEC moved to require greater accountability on and boost the quality of asset-backed securities when issuers seek to use an expedited registration process known as shelf registration.

The new rule requires large traders to register with the SEC through a new form (Form 13H), and imposes recordkeeping, reporting, and limited monitoring requirements on certain registered broker-dealers through whom large traders execute their transactions.

It defines a “large trader” as a person whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month.

After it files Form 13H to register with the agency, the SEC will then assign each large trader a unique large trader identification number (LTID), which will allow it to identify and analyze trading activity by the large trader. A large trader will be required to disclose to its broker-dealers its LTID and highlight all of the accounts at the broker-dealer through which the large trader trades.

The rule also requires broker-dealers to maintain and report data that is largely identical to the information covered by the SEC’s Electronic Blue Sheets (EBS) system – the system containing transaction data from broker-dealers.

The only additional items that broker-dealers need to maintain and report are the LTID and the time a transaction occurs. Accordingly, the rule leverages the existing EBS system, with modifications, to accommodate the specific requirements of the new rule.

In addition, the rule requires broker-dealers to monitor whether their customers meet the threshold levels that define a “large trader” (based on transactions handled at the broker-dealer) in order to encourage compliance by their customers with the requirement to identify themselves as large traders to the SEC.

The rule requires transaction data to be available for reporting on the morning after the day the transactions were effected.

When the SEC requests data from broker-dealers, it would not require responses earlier than the opening of business on the day after it makes its request under normal circumstances, which will assist the SEC to reconstruct market activity and perform other trading analyses, and also will assist in investigations of manipulative, abusive, and other illegal trading activity.

“In light of the rapid development in trading technology and strategies, the SEC has been conducting an in-depth review of the structure of the U.S. market,” the SEC said in a statement.

“Unlike years ago, trades today are transacted in milliseconds or faster and dispersed among many trading centers. These changes have allowed large market participants to employ sophisticated trading methods to trade electronically on multiple venues in huge volumes at very fast speeds.

“Because of these changes, the SEC believes it is now appropriate to exercise its authority under Section 13(h) of the Securities Exchange Act of 1934 to establish a large trader reporting rule.”

As large traders, including high-frequency traders, appear to be playing an increasingly prominent role in the securities markets, the SEC believes it must have better access to information on these entities.

“May 6 dramatically demonstrated the need to enhance the SEC’s ability to quickly and accurately analyze market events. The large trader reporting rule will significantly bolster our ability to oversee the U.S. securities markets in a time when trades can be transacted in milliseconds or faster,” said SEC Chairman Mary Schapiro.

“This new rule will enable us to promptly and efficiently identify significant market participants and collect data on their trading activity so that we can reconstruct market events, conduct investigations, and bring enforcement actions as appropriate.”

Among other things related to its market structure review, the SEC has already adopted rules prohibiting broker-dealers from providing their customers with unfiltered access to exchanges and other alternative trading systems. The SEC it would assure that broker-dealers implement appropriate risk controls.

The SEC has also approved rules that will require the exchanges and FINRA to pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period. This pilot program applies to stocks in the S&P 500 or the Russell 1000 as well as certain exchange-traded products.

New rules clarifying up front how and when erroneous trades would be broken have also been approved by the agency, in addition to the rules proposed by the exchanges and FINRA to strengthen the minimum quoting standards for market makers and effectively prohibit “stub quotes” in the U.S. equity markets.

Additionally, the SEC has already proposed a new rule that would require the SROs to establish a consolidated audit trail system that would enable regulators to track information related to trading orders received and executed across the securities markets.

Rule 13h-1 will be effective 60 days after the date of publication of the rule in the Federal Register. The SEC gives large traders two months after the effective date to comply with the identification requirements of the rule.

Meanwhile, broker-dealers will have seven months after the effective date to comply with the requirements to maintain records, report transaction data when requested, and monitor large trader activity.


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