Quick Answer
A broker-dealer with or providing market access must keep direct and exclusive control over its controls, except specific regulatory controls allocated by written contract after thorough due diligence to a better-placed registered broker-dealer customer not trading proprietarily. Financial controls reject orders over pre-set credit or capital thresholds and erroneous orders before entry. The chief executive or equivalent officer certifies annually.
Which firm is bound, what its controls reject before entry, and who may hold or certify them.
Which One-Liners Win Points?
- Two branches, one needed: trading access to an exchange or alternative trading system (ATS) as a member or subscriber, or access an ATS's broker-dealer operator gives a non-broker-dealer.
- Direct market access versus sponsored access: orders generally flow through the firm's trading systems in the first and bypass them in the second, and the label changes no duty. Unfiltered or naked access, a subset of sponsored access with no pre-trade filters, is effectively eliminated.
- Both named financial controls are required: reject orders over pre-set credit or capital thresholds, in the aggregate for each customer and for the firm, and reject orders exceeding price or size parameters or indicating duplicative orders.
- Regulatory controls cover all regulatory requirements, including four named duties: block orders unless pre-order entry requirements are met, block securities the firm, customer or other person is restricted from trading, limit system access to pre-approved and authorized persons and accounts, and send immediate post-trade execution reports to appropriate surveillance personnel.
- The one allocation: specific regulatory controls may go to a registered broker-dealer customer not trading for its own account, by written contract after a thorough due diligence review, where it has better access to the ultimate customer. Financial controls never move.
- Routing broker exception: routing for an exchange or ATS to meet order protection or listed-options-plan compliance lifts the rule for those services, except the erroneous-order control.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Venue sub-limits | Sum to the aggregate: $1,000,000 across five venues supports $200,000 each |
| Business-activity review | No less frequently than annually, under written procedures, documented |
| Certification and review documentation | Not less than 3 years, the first 2 easily accessible |
Which Gotchas Trip Students Up?
- Rejecting means preventing entry. Scramble and chase-and-cancel designs fail. Manual controls suffice only for an order handled and executed purely manually, with no electronic system involved before execution.
- Measure orders entered, not executions. Open orders consume the threshold, and a venue sub-limit assumes the maximum is used everywhere else.
- Market maker quotes are orders. Staff say the rule has no exclusion for them.
- Only the execution report runs after execution. Reports arrive immediately; surveillance follows in a timely fashion.
- Allocation moves control, not responsibility. An attestation is not compliance, and staff bar allocation to a customer trading for its own account.
- The certification has two limbs: the controls comply, and the firm conducted the review.
One-Breath Recap
A broker-dealer with market access, or providing it to others, must establish, document and maintain reasonably designed controls under its direct and exclusive control. Financial controls reject, before entry, orders over pre-set credit or capital thresholds for each customer and the firm, and erroneous or duplicative orders. Regulatory controls include blocking orders failing pre-order entry requirements or in securities the firm, customer or other person is restricted from trading, limiting system access to pre-approved and authorized persons and accounts, and sending immediate execution reports to surveillance personnel. Only specific regulatory controls may be allocated, by written contract after thorough due diligence, to a better-placed registered broker-dealer customer not trading for its own account. The chief executive or equivalent officer certifies annually that the controls comply and the review occurred.
Need more than the recap? Read the full Market Access unit.