SEC seeks to regulate principal trading firms

By Jeff Drew

The SEC issued a proposal Monday that would bring certain market participants, most notably principal trading firms (PTFs), under the Commission's regulatory jurisdiction.

In a unanimous vote, the SEC proposed two rules that would require market participants that assume certain dealer functions to register with the SEC, become members of a self-regulatory organization (SRO), and comply with federal securities laws and regulatory obligations.

Specifically, the proposal expands the definition of "dealer" and "government securities dealer" to include entities that engage "in a routine pattern of buying and selling securities that has the effect of providing liquidity to other market participants" through activities such as:

  • "Routinely making roughly comparable purchases and sales of the same or substantially similar securities in a day; or
  • Routinely expressing trading interests that are at or near the best available prices on both sides of the market and that are communicated and represented in a way that makes them accessible to other market participants; or
  • Earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity-supplying trading interests."

Among the firms affected by the proposal are those that use technology-powered algorithmic trading to trade securities in large volumes and at lightning speeds. The most prominent of these entities are PTFs, also known as principal trading firms, which represent 50%-60% of the volume on interdealer broker platforms in the U.S. Treasury market and account for a large percentage of the total volume on the broader secondary markets, according to the SEC.

In addition, the proposal includes a quantitative measure, which would require individuals who had at least $25 billion of trading volume in government securities in at least four of the previous six calendar months to register with the Commission.

"The proposed rule further says it shouldn't be presumed that certain persons are not dealers solely because they don't meet the standards of the rules," SEC Chair Gary Gensler said in a statement. "Other patterns of buying and selling may have the effect of providing liquidity to other market participants or otherwise require a person to register under otherwise applicable precedent."

The proposed rules would not apply to a registered investment company or to a "person that has or controls total assets of less than $50 million."

The deadline for commenting on the proposal is either 60 days after the release is published on the SEC website or 30 days after the notice is published in the Federal Register, whichever period is longer.

— To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.

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