New Rules At the TMX: New Regulations for Venues and Broker Dealers Regarding Direct Market Access

The US government, through the SEC, or the Securities and Exchange Commission, has reviewed the rules governing direct market access. These new rules affect Venues and Broker Dealers in various ways and have trickled down to the Canadian market.

Direct Market access is a term that can be used to refer to electronic and digital equipment that allow buyers of securities to purchase these securities and shares by accessing them directly. The electronic and digital equipment are usually supplied and set up by independent firms. There are benefits of using this type of trading. It reduces errors that can arise due to common human mistakes that computers can take care of. The system also reduces the cost of trading by a substantial margin, especially on the buyer’s side.

The new rules affect venues and others who access the exchange directly. If a customer is able to send a request directly to the exchange via a broker or dealer, then this is going to change from now, according to the new rules. According to insiders, the rules are said to affect all orders originating from clients to the exchange using brokers. The orders may involve any equity or security such as equities, debt securities, ETFs and swaps. The rules also affect all broker dealers that allow customers’ access to the securities exchange platform such as naked, direct or through an agency brokerage firm.

These new rules introduce a couple of challenges that broker dealers need to address and find amicable solutions for. The regulations demand that broker dealers should not allow a customer to place orders that exceed their capital and credit thresholds. This should be achieved by brokers introducing and setting control levels as well as supervision of the entire process so as to ensure compliance with the regulations.

The current procedures apply to broker dealers and they are bound by securities exchange commission rules and laws. However, these rules do not apply to customers, clients and other customers. Now, broker dealers and venues of trading usually have an MPID key, or market participant identifier key that enables them access to the securities exchange and the ability to transact or place orders on behalf of their clients. Now, sometimes, the broker dealers allow their clients direct access to the securities exchange by allowing them use of the key. This is also sometimes referred to as naked access. It can easily affect the sell side of the exchange. The sell side, however, won’t be much affected by these new rules.

As these naked access trades are normally not supervised and the access is not under the jurisdiction of the Securities and Exchange Commission, it is possible for violations and other risks to be perpetrated. This is why these regulations were introduced.

The TMX group is an exchange group of businesses that deal in derivatives as well as cash markets. The TMX group also deals in various classes of assets that include energy, fixed income and equities.

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