SEC bans brokers from allowing unsupervised trades by clients

The U.S. Securities and Exchange Commission banned brokers from letting clients make unsupervised trades on stock exchanges amid concern that a rogue transaction could roil markets. SEC commissioners voted 5-0 today to approve a rule that requires brokers to implement pre-trade risk controls when clients use the firms’ identification codes to trade directly on exchanges. Agency officials proposed the regulation in January, saying they were concerned that a computer malfunction or human error might trigger an order that would erode a broker’s capital. The SEC rule targets so-called naked-sponsored access, in which a customer uses a broker’s identification code while bypassing pre-trade risk controls. The tactic is used by traders whose strategy of buying and selling thousands of shares in milliseconds would be slowed if they executed through a broker. The SEC is cracking down on computerized trading that relies on speed to make money after lawmakers such as outgoing U.S. Senator Ted Kaufman, a Delaware Democrat, questioned the agency’s oversight of electronic markets. The May 6 crash, which temporarily erased $862 billion of value from equities in 20 minutes, also led the SEC to increase scrutiny of high-frequency trading. “The potential impact of inappropriate trading has become more severe as our securities markets have become more automated, and high-speed trading more prevalent,” SEC Chairman Mary Schapiro said at today’s meeting. “Additionally, as the events of May 6 demonstrated, the financial markets today are highly inter-connected, and an event in one market can rapidly spread throughout the financial system.” Naked access accounts for about 38 percent of U.S. equities trading, according to a December study by Aite Group LLC.