Why the New Direct Market Access Rule Was Implemented

Recent developments in the field of computer applications have seen trade at the US markets computerized. There were several benefits derived from this. Traders can conduct business and trade at the markets, selling and buying securities at the touch of a button. To access the trading floor, the exchange provided dealers with an access code that enables them log into the system and conduct trade as they please. The dealers and brokers are however registered and also bound by rules and regulations as provided by the SEC, or Securities and Exchange Commission.

Now, many dealer brokers have been allowing their clients and customers as well as other users to use the access code provided by the SEC to trade and conduct business on the bourse. This is often referred to as naked access.

The new rules as put forward by the Securities and Exchange Commission basically sought to tame this idea. Basically, it is unacceptable that traders who are not regulated and do not fall under the jurisdiction of the SEC can conduct business directly on the trading floor. The rule mainly seeks to bar orders placed directly by clients of brokerage firms to a securities exchange platform while using the MPID or market participant identifier issued to a broker or dealer.

The dealers and brokers are usually required to, and are expected to adhere to, laid down regulations. These regulations only apply to them and cannot extend to their clients. This is why the SEC is seeking to regulate direct market access. The new rule put forward by SEC, the exchange commission, seeks to have dealers and brokers put in place risk controls before providing their clients and customers direct market access.

While this rule is basically a US market rule and does not directly affect the Canadian markets, stock brokers and securities firms such as Canada’s TMX have operations and like other sell side dealers, will be affected. While TMX is a big shares trader with operations across the US, only sell side parties will be affected. However, normal trading operations on the US markets are expected to proceed as usual.

US-based dealers and brokers are faced with a difficult situation. The SEC requires that they come up with stringent yet effective rules and controls that will enable them regulate and supervise access to previously unfettered naked access or sponsored access to the markets via the provided MPID. This is especially important as they key is that risk controls will prevent trades that exceed set capital and credit thresholds.