Richard Ketchum, the new CEO of the Financial Industry Regulatory Authority, warned broker-dealers that they must oversee their high-frequency-trading customers sending flow directly to exchanges. These so-called “sponsored access” arrangements enable trading shops and hedge funds to send flow to market centers without passing through their brokers’ systems.
“This is both of our problems, but it is particularly your problem,” Ketchum told the sellside crowd this week at the annual Security Traders Association’s conference in Washington, D.C. “Your supervisory responsibilities do not change.”
Brokers must understand what their customers are doing and gain real-time information about that activity to meet their oversight responsibilities for flow being sent to the market under their name, he said. Ketchum, the former chief executive of NYSE Regulation, joined FINRA in March. He ran New York’s regulatory company for five years.
“From the SEC to each of the exchanges to FINRA, it is something we are quite concerned with,” Ketchum said. “You need to be comfortable with those high-frequency trading traders operating on their own,” and with the risk they’re taking on through their trading. He added that brokers must make sure their customers are not creating “fat-finger issues” and sending orders to the market accidentally.
Ketchum reminded the group that Nasdaq has a rule proposal before the Securities and Exchange Commission, laying out new sponsored access obligations. If the proposal is approved, other exchanges are expected to follow suit with similar rules.
