Hedge funds and high-frequency traders who circumvent brokerages in the U.S. stock market now account for 38 percent of the nation’s transactions, a fourfold increase from 2006.
The practice known as naked sponsored access, in which investors shave milliseconds off the time it takes to complete orders by skipping pre-trade risk checks, is being reviewed by regulators.
With naked sponsored access, brokerages allow investors to use their trading codes in order to buy and sell shares without oversight.
Report Sees Growth of High-Frequency Trading in Stock Markets
Aite Group, a Boston consultancy, found that naked access accounted for just 9 percent in 2005.
“The idea here is to level the playing field so that no one segment of the market has a clear advantage caused by lack of industry uniformity in risk checks,” Mr. Lee wrote.
Naked access is not allowed in Europe.
There is no industry-wide standard for brokers. While firms such as Wedbush Morgan and Pension Financial provide naked access, bigger brokers such as JPMorgan Chase and Goldman Sachs Group only provide filtered access.
Any new rules could redirect the flow of fees and volumes.
Aite: More Oversight Inevitable for Sponsored Access
Regulatory change involving new practices relating to sponsored access appears inevitable, with naked sponsored access in particular coming under greater scrutiny, says a new report from Boston-based research firm Aite Group.
Average cost of sponsored access varies widely, Aite says. Most firms offering unfiltered sponsored access start at $ 0.001 per share, dipping as low as $0.00025 per share for larger volume customers. Filtered sponsored access brokers’ fees range from $0.005 to $0.008 per share.
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