The Securities and Exchange Commission voted unanimously on July 26 to require large trading firms to identify themselves, so their market activities can be tracked.

But what if they elect not to identify themselves? How exactly will the SEC know who the large firms are? And what is the ultimate extent of the requirements placed on U.S. brokers to identify, for instance, large traders if they are not based in the United States?

These sorts of questions may get resolved when the Large Trader Rule is posted to the Federal Register and the details of its terms and methods of enforcement gets scrutinized and its ins and outs evaluated by market participants everywhere. Here's a link to a copy.

Already, off the record, you hear creative minds grinding away.

Say you’re a hedge fund in Liechtenstein. If you trade directly with a Goldman Sachs or a Merrill Lynch, there is likely to come a time when the SEC pays a visit to Goldman or Merrill and asks them to identify who you are. Because the broker wants to stay in adherence to requirements to identify large traders, if the large traders don’t register themselves.

What’s to keep the Liechtenstein hedge fund, though, from setting up different accounts with different banks in Europe. Those banks in turn could set up relationships with either or both Goldman and Merrill.
And if the SEC has the smarts and the nerve to figure that this splitting up and hiding of activity is taking place, it still could get stymied. If an examiner or investigator gets on a plane, goes to Liechtenstein and pays an official visit to the bank, the bank may well be within its own local rights to say: Sorry, can’t disclose that.

That kind of approach could easily be mimicked in the United States, any way. You can be almost certain that a large trader that doesn’t want to be identified will find ways to route their orders to multiple brokers or banks. That way, the trader’s volume never crosses $20 million in a single day or $200 mllion in a calendar month with any one market intermediary.

And, it says here, you won’t find any requirement for those intermediaries to share their books.

So a firm that really doesn’t want to register can split its volume up and stay below the thresholds, acknowledges expert counsel in the securities industry.

Which means it’s time to get on with a serious consolidated audit trail, where all market players are identified, all transactions are tracked and all data is sent into a single data repository. In effect, the industry’s entire book of transactions gets copied, in one fashion or another, into a coordinated record that the SEC can review at will and search for patterns, if some organization is trying to avoid detection.

This article originally appeared on Securities Technology Monitor's Securities Industry Blog.