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Wednesday, April 14, 2010

SEC May Put Codes on Biggest Traders, Cap Option Fees

(Bloomberg) -- The Securities and Exchange Commission backed proposals today that would assign identification codes to monitor the largest stock traders and impose a limit on fees for options transactions.

Commissioners voted 5-0 in favor of a program that would require firms that buy and sell at least 2 million shares a day to report their identity to regulators. The rule would also apply to companies that execute $20 million of equities a day or $200 million in a month.

The SEC is evaluating whether strategies used at high- frequency trading firms and hedge funds are hurting markets by increasing volatility and making it more difficult for investors to complete transactions. Lawmakers such as U.S. Senator Ted Kaufman question whether companies that trade thousands of shares in milliseconds and account for more than 60 percent of U.S. volume hurt returns for long-term investors.

“Today’s proposed rules are necessary to keep pace with our ever-changing securities markets -- markets that have undergone dynamic transformation in recent years,” Chairman Mary Schapiro said in a statement. “The fact is that rapid technological advances have had an impact on trading strategies and on the ways in which some broker-dealers carry out their trades.”

Under its proposal, the SEC would assign so-called large traders identification codes that would allow the agency to identify and analyze transactions. About 400 of the biggest firms would have to share codes with their brokerages, which would maintain records and provide data to the SEC.

Manipulative Transations

Data would be available to the SEC the day after trades are made, allowing the agency to promptly investigate manipulative and abusive practices, the agency said. The SEC will seek comment on its proposal before agency commissioners consider holding a second vote on it to make the requirements binding.

Commissioners also voted 5-0 to back a proposal capping fees for trading options at 30 cents a contract, a rule supported by brokerages who say getting the best bid or ask price for their customers sometimes costs too much.

Citadel Investment Group LLC petitioned in July 2008 to limit charges by exchanges to execute against orders on their books. SEC requirements that brokers buy and sell securities for clients at the best available quote in the marketplace may encourage venues to charge “excessive” fees to access their systems, masking the true cost of trading, it said.

Best Price

“Brokers have to get the best quoted price, which is good,” said Andrew Kolinsky, president of Citadel’s market- making unit. “If an exchange is allowed to charge unlimited access fees to get at the supposedly best price, then what’s disseminated as the best price is not really the best.”

Eight exchanges compete for business in the U.S. options market, where volume reached a record in 2009. The SEC under Schapiro has been studying ways of adding transparency to trading without hurting exchanges’ ability to tailor services for professionals, their biggest source of growth in revenue and market share.

Equity exchanges and some options platforms instituted fees and rebates in the last decade to attract brokerages whose traditional way of making money, capturing the spread between bid and ask quotes, was squeezed as price increments narrowed. The model, known as maker-taker pricing, rewards brokers and investors who put requests to buy and sell shares in an exchange’s book and charges those who execute against them.

Fee Structure

International Securities Exchange Holdings Inc. spokeswoman Molly McGregor, Gail Osten of Chicago Board Options Exchange and NYSE Euronext’s Eric Ryan declined to comment before the SEC meeting. Nasdaq OMX Group Inc. spokesman Robert Madden didn’t respond directly to a request for comment about a cap on access fees. The ISE, NYSE and Nasdaq are based in New York.

NYSE Euronext asked the SEC in September 2008 to reject Chicago-based Citadel’s petition because it “fails to take into consideration the fee structures of all options exchanges,” including inducements called payment for order flow used on venues such as CBOE and ISE. Exchanges that offer these programs typically don’t charge customers for executions.

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