Quick Answer
A large trader exercises investment discretion, directly or indirectly, over accounts and effects transactions in national market system securities through registered broker-dealers at or above the identifying activity level, or registers voluntarily. That level is 2 million shares or $20 million in a calendar day, or 20 million shares or $200 million in a calendar month.
The large trader rule finds the people and firms whose trading moves size. This lesson covers the tests that decide who is one, and the filing and disclosure duties that follow are in the lesson on filing Form 13H and disclosing large trader status.
Who Counts as a Large Trader?
The large trader rule gives a person large trader status on either of two routes.
- The activity route. The person, directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts, and effects transactions for the purchase or sale of any national market system (NMS) security for or on behalf of those accounts, by or through one or more registered broker-dealers, in an aggregate amount equal to or greater than the identifying activity level.
- The voluntary route. The person voluntarily registers as a large trader by filing Form 13H electronically with the SEC.
Investment discretion carries its statutory meaning. A person exercises investment discretion over an account if, directly or indirectly, that person does any one of three things.
| The statutory test | What it reaches |
|---|---|
| Is authorized to determine what securities or other property shall be purchased or sold by or for the account | Formal trading authority |
| Makes decisions as to what securities or other property shall be purchased or sold by or for the account, even though some other person may have responsibility for those investment decisions | Actual decision-making, even without formal authority |
| Otherwise exercises such influence over the purchase and sale of securities or other property by or for the account as the SEC by rule determines, in the public interest or for the protection of investors, should be subject to the statute and its rules | The catch-all the SEC can extend by rule |
A person's employees who exercise investment discretion within the scope of their employment are deemed to do so on behalf of that person, so their discretion counts as the employer's.
Exam Tip: Gotchas
- The activity route needs both halves, not either half. Discretion over accounts alone is not enough, and volume alone is not enough. The person must exercise investment discretion and effect transactions at or above the identifying activity level through registered broker-dealers.
- Voluntary registration is a route to the status, not a courtesy. A person who files Form 13H voluntarily becomes a large trader without ever reaching the identifying activity level.
What Does Control Mean Under This Rule?
Control, together with the terms controlling, controlled by and under common control with, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of securities, by contract, or otherwise.
For purposes of this section only, the rule then presumes control where a person directly or indirectly:
- Has the right to vote or direct the vote of 25% or more of a class of an entity's voting securities
- Has the power to sell or direct the sale of 25% or more of a class of that entity's voting securities
- In the case of a partnership, has the right to receive upon dissolution, or has contributed, 25% or more of the capital
Exam Tip: Gotchas
- The 25% presumptions are scoped to this rule alone. The rule says "for purposes of this section only", so a 25% voting stake that creates a presumed control relationship here does not carry that presumption into an unrelated rule.
- Control matters twice. It pulls a controlled person's discretion into the parent's activity count, and it opens the relief that lets a controlling or controlled person meet all of the large trader's identification requirements on its behalf.
What Do the Two Activity Levels Measure?
The rule sets two separate levels that measure different things. One decides who is a large trader. The other decides which transactions a broker-dealer has to report when the SEC asks.
| Level | What it measures | The figures |
|---|---|---|
| Identifying activity level | Aggregate transactions in NMS securities that make a person a large trader | Equal to or greater than, during a calendar day, either 2 million shares or shares with a fair market value of $20 million; or, during a calendar month, either 20 million shares or shares with a fair market value of $200 million |
| Reporting activity level | The transactions a registered broker-dealer reports on SEC request | Each transaction in NMS securities effected in a single account during a calendar day that is equal to or greater than 100 shares; any transaction in NMS securities for fewer than 100 shares effected in a single account during a calendar day that a registered broker-dealer may deem appropriate; or such other amount as the SEC may establish by order from time to time |
Exam Tip: Gotchas
- The identifying level is a two-window test, and either window can trip it. A trader under 2 million shares every single day can still cross on the 20 million share monthly window, and either share count or either dollar value works.
- The reporting activity level is not a large trader test. It is the size filter on what a broker-dealer hands the SEC, and its default floor is each transaction of 100 shares or more effected in one account during a calendar day.
Which Transactions Are Excluded From the Large Trader Test?
The term transaction means all transactions in NMS securities, excluding the purchase or sale of such securities pursuant to exercises or assignments of option contracts. That exclusion applies wherever the term is used.
Then, for the sole purpose of determining whether a person is a large trader, the rule excludes eight further categories.
| Excluded category | Detail |
|---|---|
| Journal or bookkeeping entries | Any entry made to an account in order to record or memorialize the receipt or delivery of funds or securities pursuant to the settlement of a transaction |
| Offerings | Any transaction that is part of an offering of securities by or on behalf of an issuer, or by an underwriter on behalf of an issuer, or an agent for an issuer, whether or not the offering is subject to registration under the Securities Act, provided that the exemption does not include an offering effected through the facilities of a national securities exchange |
| Gifts | Any transaction that constitutes a gift |
| Decedents' estates | Any transaction effected by a court appointed executor, administrator or fiduciary pursuant to the distribution of a decedent's estate |
| Court orders | Any transaction effected pursuant to a court order or judgment |
| Qualified plan rollovers | Any transaction effected pursuant to a rollover of qualified plan or trust assets subject to the Internal Revenue Code's rollover provision |
| Employee plans | Any transaction between an employer and its employees effected pursuant to the award, allocation, sale, grant or exercise of an NMS security, option or other right to acquire securities at a pre-established price under a plan primarily for the purpose of an issuer benefit plan or compensatory arrangement |
| Business combinations | Any transaction to effect a business combination, including a reclassification, merger, consolidation or tender offer subject to the Exchange Act's tender offer provisions; an issuer tender offer or other stock buyback by an issuer; or a stock loan or equity repurchase agreement |
Exam Tip: Gotchas
- The offering exclusion has a proviso that swallows exchange distributions. An offering does not count toward large trader status, unless it is effected through the facilities of a national securities exchange, in which case it counts.
- The eight exclusions are scoped to the status test only. They apply for the sole purpose of determining whether a person is a large trader. The option exercise and assignment exclusion sits in the main definition instead, so it is not limited that way.
How Are Transactions Aggregated?
For the purpose of determining whether a person is a large trader, three aggregation rules apply.
- The volume or fair market value of transactions in equity securities, and the volume or fair market value of the equity securities underlying transactions in options on equity securities, purchased and sold, are aggregated.
- The fair market value of transactions in options on a group or index of equity securities, or based on the value of such a group or index, purchased and sold, is aggregated.
- Under no circumstances may a person subtract, offset or net purchase and sale transactions, in equity securities or option contracts, among or within accounts, when aggregating volume or fair market value.
A separate paragraph closes the other escape route: under no circumstances shall a person disaggregate accounts to avoid the identification requirements of the rule.
Exam Tip: Gotchas
- Purchases and sales add, they do not cancel. A trader who buys 1.2 million shares and sells 1.1 million shares in a day has 2.3 million shares of aggregate activity, not 100,000 shares net.
- Equity options count through their underlying shares. Options on individual equities are aggregated by the volume or fair market value of the underlying equity securities, while options on a group or index are aggregated by fair market value only.
What Should You Check on Exam Day?
- Confirm the activity route needs investment discretion and transactions at or above the identifying activity level through registered broker-dealers, not one of the two.
- Read the window in the figure: 2 million shares or $20 million is a calendar day, and 20 million shares or $200 million is a calendar month.
- Check whether the scenario nets purchases against sales. Netting and disaggregation are both barred, so add the two sides together.
- Ask whether an excluded transaction is really excluded: an offering through the facilities of a national securities exchange still counts.
- Watch the scope words: the eight exclusions apply for the sole purpose of deciding whether a person is a large trader.