The Securities and Exchange Commission voted Wednesday to adopt a rule that requires broker-dealers to establish "risk controls" before providing their customers with market access.
Broker-dealers can electronically access an exchange or alternative trading system (ATS) with a market participant identifier. Under the new rule, BDs will be prohibited from allowing customers "naked access" to an exchange or ATS using the BD's identifier.
When customers access the exchange without going through their BD, the SEC claims there is an "increased likelihood" that the customer will enter incorrect orders, either as a result of computer malfunction or simple human error; that customers will fail to comply with regulatory requirements; or that customers will breach a credit or capital limit.
"In addition, the inter-connectedness of the financial markets can exacerbate market movements, whether they are in response to actual market sentiment or trading errors," the SEC noted in a statement announcing the rule.
Chairman Mary Schapiro (left) compared the practice with "giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied."