Was the U.S. Securities and Exchange Commission's decision to ban "naked" access to the public markets an anti-small business maneuver?
Although it was a necessary step, particularly in the aftermath of the May 6 "Flash Crash," there is growing chatter within the trading community that the new regulation is likely to hurt smaller high-frequency trading operations.
The new environment poses a dilemma for these small businesses. Either compromise your profitability by continuing to process time-sensitive trades through brokerages which now have to tighten up their risk curbs. Or become a broker-dealer and lose access to the top-tier rebates that larger firms enjoy, which is the reason why most of them used sponsored access in the first place.
Neither option is particularly palatable for smaller trading operations, according to Jamie Selway, Investment Technology Group's managing director.
"Where 'naked' access is used to reach an exchange's volume-based price tier … brokerage status doesn't help," Selway says in a research note. "Smaller high-frequency firms therefore may be negatively impacted unless brokers that aggregate order flow can reduce system latency such that pre-trade controls don't impact time-sensitive strategies."
And while it's unclear what the ramifications will be for algorithmic trading under these new guidelines, regulators would be wise not to encroach on that sector, Selway contends. "Many would argue that the market for algorithmic trading services is not conducive to this type of regulation," Selway argues. Given today's zeitgeist, alas, the industry should be on guard to prevent regulatory overreach in this direction."As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio