SEC Adopts 'Large Trader' Reporting Rule

The Securities and Exchange Commission unanimously voted Tuesday to require large trading firms to identify themselves, so their market activities can be tracked.

The adoption of its long-debated “large trader” reporting rule means any person who trades more than two million shares or $20 million worth in a single day must identify themselves and obtain an ID code for tracking purposes.

Also required to identify themselves will be persons who trade 20 million shares or $200 million during any calendar month.

Such “large traders” will then provide the unique “large trader identification number” (LTID) to their brokers, wo in turn must maintain records on all transactions. The records must be submitted to the SEC, on request.

“The large trader reporting rule will significantly bolster our ability to oversee the U.S. securities markets in a time when trades can be transacted in milliseconds or faster,” said SEC Chairman Mary L. Schapiro.

This will help the SEC reconstruct events such as a Flash Crash similar to that which occurred on May 6, 2010 she said. It will also allow the SEC to “conduct investigations and bring enforcement actions as appropriate.”

Reporting will be through a new form, known as Form 13H. The rule will become effective 60 days after its publication in the Federal Register.

The SEC also has proposed the creation of a database known as the Consolidated Audit Trail, which will become a repository of all transaction information, for pattern analysis, investigations and possible enforcement.

The SEC made no announcement Tuesday on the status of that initiative. At issue has been the cost and whether it needed to be an up-to-the-second or “real time” database or not.

The SEC had proposed the trail be real time. And said it would cost $4 billion up front to create the trail and $2 billion a year to maintain it.

Providers of market surveillance technology, such as FTEN and Noetic Partners, said the cost estimate was overstated. And industry participants questioned the need for real-time data, saying costs could be reduced if the SEC accepted next-day data and relied as much as possible on existing audit trail information.

The Order Audit Trail System maintained by the Financial Industry Regulatory Authority is now being expanded to keep track of details of orders from all major exchanges.

The nit and grit of complying with the Securities and Exchange Commission’s proposal for identifying large traders and time-stamping all their trades will be hugely challenging for both large traders and their broker-dealers, attorneys representing investment banking, trading, fund management and accounting firms said a year ago.

A large trader has been defined under the SEC proposal as a person who:

• Directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts, and

• Effects transactions for the purchase or sale of NMS securities for or on behalf of such accounts, by or through one or more registered broker-dealers in an aggregate amount equal to or greater than the identifying activity level.”

Lisa Bloomberg, senior vice president and deputy general counsel for Oppenheimer Funds, noted last June that there will be significant difficulties in just figuring out organizational structures. The first challenge often will be figuring out who the parent company is. A “herculean task,” another attorney said, will be to put together even the most basic information for complex organization with thousands of affiliates or providing list of accounts over which the affiliates exercise investment discretion.

There also will be issues will identifying companies who don’t have to report their identities at all to the SEC, at this point. Private companies who are now defined as large traders suddenly must being disclosing information about their operations, what investments they have and what broker dealers they use.

But even on a simpler basis, a single change to a single attribute in a single report can take several hours of work on an information system to implement, she and Christopher Mahon, managing director for Global Equities and Investment Banking Compliance at Deutsche Bank noted.

This article originally appeared in Securities Technology Monitor.