Rosenblatt Securities Inc.

Sponsored Access a 'Business Model Fight'

Friday, January 22, 2010

The debate over regulating sponsored access is partly a battle between trading firms that allow unfiltered sponsored access and those that do not, according Joe Gawronski, president and chief operating officer of Rosenblatt Securities.

“A lot of this fight is a business-model fight,” Gawronski told Markets Media on Friday. “There are two different models; firms like FTEN, Lime Brokerage and most of the major prime brokers employ pre-trade risk controls. A handful of firms, like Wedbush, Sungard's Assent unit, and Penson, offer unfiltered access for at least part of their business. FTEN has been particularly vocal about this issue and has pushed the [U.S. Securities and Exchange Commission] on this front. “

Last week, the SEC proposed banning so-called “naked” access, a trading arrangement in which a broker-dealer allows a client to use its Market Participant Identification to access an exchange directly. Gawronski said that such arrangements do not necessarily present an added risk to the system, as some of the customers of these firms are large, sophisticated high frequency traders that have strong risk management.

“Obviously, politicians are most concerned about systemic risk,” Gawronski said. “The way trading has changed has introduced more risk of ‘fat-finger' or errant code creating major dislocations. They're looking for some type of pre-trade risk control, and for the broker to retain control of the controls.”

SEC action will force some market players to adjust, but there is no reason to believe that regulation will be broadly disruptive.

“Regulation could impact Wedbush and some other firms who do sponsored access, as they will have to move to a different model, but surely they have been preparing for this as it was expected that the SEC would act on this issue,” Gawronski said. “This will be a negative for them as it will eliminate a latency advantage they have and increase their costs as they deploy new platforms to comply, but I do not see it having a widespread impact of reducing trading volumes.”

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