Rule 15c3-5 takes common-sense steps toward avoiding a future flash crash, but fails to apply to all trading markets.
Boston, October 13, 2011 – A new report from Aite Group examines U.S. market preparedness for the implementation of the U.S. Securities and Exchange Commission’s Rule 15c3-5, also known as the “market-access rule.” Based on Aite Group conversations with pre-trade risk vendors, broker-dealers, and the SEC, the report outlines the benefits and shortcomings of the rule and assesses the true cost of compliance.
Following the May 6, 2010 “flash crash,” the U.S. SEC was determined to implement mandatory pre-trade risk checks in an effort to reduce risk across the market. Rule 15c3-5 was born, and took partial effect on July 14, 2011. Critical components around credit checks and fixed income will take effect on November 30, 2011. Though the flash crash proved that markets are interdependent, the rule was created sans SEC collaboration with the Commodity Futures Trading Commission (CFTC) or global regulatory bodies. This is troubling, since very few—if any—prime brokers offer their clients exclusively SEC-regulated products, and clients increasingly trade multi-asset or global strategies.
“The implementation of Rule 15c3-5 takes steps toward preventing another flash crash, but it won’t entirely hamper a recurrence,” says Adam Honoré, research director with Aite Group and author of this report. “The rule is a common-sense equalizer, but fails to take into account the futures market, regulated by the CFTC, and markets outside the United States. Nevertheless, regulators, broker-dealers, and vendors should collaborate to ensure the spirit of the law is enforced as rigorously as the letter of the law, across all asset class markets.”
The report provides brief insights into pre-trade risk technologies available from Bon Trade, Fixnetix, FTEN (NASDAQ OMX), Mantara, NYSE Technologies RMG, SunGard, and ULLINK.
This 15-page Impact Note contains five figures and three tables. Clients of Aite Group's Institutional Securities & Investments service can download the report.