SEC Adopts Stricter Reporting Regime for Large Traders

In an effort to enhance the transparency and surveillance of financial markets and avoid sudden market meltdowns like the "flash crash" in May 2010, the Securities and Exchange Commission (SEC) unanimously voted on July 26 to employ a stricter rule governing large trader reporting requirements, according to the Wall Street Journal.

The SEC defines a large trader as an investor who trades in excess of two million shares, or $20 million, per calendar day or an investor who trades 20 million shares, or $200 million, per calendar month, according to the Associated Press.

The new rule, Rule 13h-1, which was first proposed in April 2010 -- a month before the May flash crash and three months before the July 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act -- will take effect in approximately 60 days, said the AP.

The hope is that the new rule -- which sets up a tighter reporting regime for broker-dealers and large traders such as hedge funds and banks -- will, in the words of SEC Chair Mary Schapiro, "significantly bolster our ability to oversee the U.S. securities markets," according to an SEC press release. The new rule, Shapiro said, will boost the SEC's capacity to pinpoint high-volume market participants and collect and later analyze data on their trading activities.

The rapid-paced electronic nature of trading today -- "trades can be transacted in milliseconds or faster," Schapiro noted in a speech on July 26 -- necessitates that the SEC be better able to track and have more readily available information on large market participants. These large market participants can, said Shapiro, "trade electronically in substantial volumes, at high speed, and in multiple venues." The need for enhanced access to data about large traders is "heightened" by the "increasingly prominent" role they are playing in the securities market, according to Forbes blog Law of the Market.

Specifically, large traders will now be required to register with the commission by filling out a new form, Form 13H, after which they will be subject to certain recordkeeping, reporting and monitoring mandates, said the SEC. For example, large traders will be required to keep a close watch on their brokers to see if they also meet the monetary and trading threshold for registration, with the purpose of encouraging compliance with the new rule, according to the commission.

Once a large traders files Form 13H, the SEC will assign a unique identification number to it which it must disclose to its broker-dealer, who in turn will be required to use the number to help keep track of all the accounts through which the large trader uses the broker-dealer to execute trades, according to Law of the Market.

The entire Dow Jones industrial average plummeted 700 points in just a few minutes on May 6, 2010, as the result of what was later found -- after several months of investigation by the SEC -- to be a $4.1 billion "computer-driven sale by a single trader." The action temporarily deleted almost $900 billion in stock market value, said the Journal -- before just as suddenly rebounding, according to the Financial Times.

The crash demonstrated that there are certain cracks in the regulatory system which allowed the abrupt market plunge to occur, such as the lack of consolidated and accessible trading information about large traders, which left the SEC in the dark and "at the mercy of other exchanges and even traders" to gather the data it needed to diagnose what went wrong, reported Reuters.

Roughly 300 brokers and 400 large market traders will be affected by the new rule, according to Thomson Reuters.