Trading on securities exchanges and alternative trading systems (ATSs) has evolved to the point that these venues now execute electronically the vast majority of their volume. This increased automation of trading and the popularity of sponsored or direct access arrangements where broker-dealers allow customers to trade in those markets using the broker-dealers' market participant identifiers (MPID) have raised concerns that broker-dealers may not be controlling effectively the financial and regulatory risks associated with such market access.
In addition, as trading in the U.S. securities markets has become more automated and high-speed trading more prevalent, the potential impact of a trading error or a rapid series of errors, caused by a computer or human error, or a malicious act, has become more severe. When problems occur, the damage that could be wrought by electronic trading errors can occur quickly and can be much more difficult to mitigate.
To mitigate the risks related to market access, and thereby enhance market integrity and investor protection in the securities markets, the Securities and Exchange Commission (SEC) adopted Rule 15c3-5 under the Securities Exchange Act of 1934. Rule 15c3-5 requires a broker-dealer with market access, or that provides a customer (which includes other broker-dealers, individuals or institutions such as a hedge fund, mutual fund, bank or insurance company) or any other person with access to an Exchange or ATS through use of its MPID or otherwise, to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks, such as legal and operational risks, related to market access. The practice of "unfiltered" or "naked" sponsored access has effectively been prohibited, since the rule requires that a broker-dealer apply these controls on a pre-trade basis. In addition, these controls, with limited exceptions, must be under the direct and exclusive control of the broker-dealer providing market access.
Definition of Market Access
Rule 15c3-5(a)(1) defines market access as:
- Access to trading in securities on an exchange or alternative trading system as a result of being a member or subscriber of the exchange or alternative trading system, respectively; or
- Access to trading in securities on an alternative trading system provided by a broker-dealer operator of an alternative trading system to a non-broker-dealer.
Further, the rule provides, "…whether the broker-dealer is trading for his own account, is trading for customers through more traditionally intermediated brokerage arrangements, or is allowing customers direct market access or sponsored access, the broker-dealer with market access is legally responsible for all trading activity that occurs under its MPID and any trading venue or exchange’s identifier number or code." As such, the compliance burden rests with the broker-dealer whose MPID is being utilized for access to the markets.
Asset classes covered by the rule are:
- equity options;
- exchange traded funds (ETFs);
- debt securities; and
- security based swaps.
FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see Interpreting the Rules for more information.
OGC staff contact:
1735 K Street, NW
Washington, DC 20006
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