Quick Answer
Direct market access generally means a customer's orders flow through the firm's trading systems before reaching the trading center. Under sponsored access they generally bypass those systems and route straight to the venue. Unfiltered access is sponsored access with no pre-trade filters. The firm whose identifier carries the order owes the same controls either way.
The market access rule never uses the phrases "direct market access" and "sponsored access". The exam outline does, and the adopting release describes both. The labels describe where the order flows, not how much duty the firm carries.
What Are Direct Market Access and Sponsored Access?
Under either arrangement the broker-dealer allows its customer to use the broker-dealer's market participant identifier (MPID), or other mechanism or mnemonic used to identify a market participant, to electronically access an exchange or alternative trading system (ATS).
The release describes that customer as an institution such as a hedge fund, mutual fund, bank or insurance company, an individual, or another broker-dealer.
| Arrangement | Where the order goes |
|---|---|
| Direct market access (DMA) | Generally, an arrangement where the customer enters orders into a trading center, but those orders flow through the broker-dealer's trading systems before reaching the trading center |
| Sponsored access | Generally, an arrangement where the customer enters orders that bypass the broker-dealer's trading system and are routed directly to a trading center, in some cases supported by a service bureau or other third-party technology provider |
| Unfiltered or naked access | Generally understood to be a subset of sponsored access, where pre-trade filters or controls are not applied to orders before they are submitted to an exchange or ATS |
Unfiltered access is not a separate category standing beside sponsored access. It is generally understood to be one kind of sponsored access, identified by the absence of pre-trade filters rather than by the routing path.
Exam Tip: Gotchas
- The dividing line between direct market access and sponsored access is the firm's own trading system. In one the order passes through it; in the other the order goes around it.
- A service bureau appears in the sponsored access description, and it is optional. The release says sponsored access is "in some cases" supported by a service bureau or other third-party technology provider.
- Unfiltered access sits inside sponsored access. Treating naked access as a separate arrangement misses that it is defined by missing pre-trade controls, not by a different order path.
Why Does the Label Not Change the Firm's Duty?
The release states that in all cases, whether the broker-dealer is trading for its own account, trading for customers through more traditionally intermediated brokerage arrangements, or allowing customers direct market access or sponsored access, the broker-dealer with market access is legally responsible for all trading activity that occurs under its MPID.
The rule reaches the arrangement by its substance. It binds a firm with market access, or one that provides a customer or any other person with access "through use of its market participant identifier or otherwise", so no branch of the rule turns on which label the arrangement carries.
The same paragraph carries one carve-out. A firm that routes orders on behalf of a venue for order-protection compliance is relieved of every duty but the erroneous-order control, for those routing services.
The Commission was blunt about the target. It said the rule "will address the serious gap that exists with those broker-dealers that today offer 'unfiltered' sponsored access."
Because the rule requires those controls to be implemented on a pre-trade basis, the Commission states that it "will necessarily eliminate the practice of broker-dealers providing 'unfiltered' or 'naked' access to any exchange or ATS".
A release footnote puts the same point as a prohibition: the rule "will effectively prohibit any access to trading on an exchange or ATS, whether sponsored or otherwise, where pre-trade controls are not applied."
Exam Tip: Gotchas
- Responsibility follows the identifier, not the routing path. The firm whose MPID carries the order answers for the trading under it, in every arrangement the release lists.
- The rule reaches proprietary and traditional agency trading too. The same sentence that names direct market access and sponsored access also names trading for the firm's own account and ordinary intermediated brokerage.
What Does an ATS Operator Owe Its Non-Broker-Dealer Subscribers?
A broker-dealer operator of an ATS owes its own duty under the second branch of the definition, which is triggered when that operator provides access to a non-broker-dealer.
Staff read that limit strictly. Where an operator has only broker-dealer subscribers, and those subscribers provide market access to their own non-broker-dealer customers, the operator owes nothing under the rule for those customers. The duty sits on the broker-dealer subscribers that provide the access.
Where an ATS operator does accept non-broker-dealer subscribers, it owes the general duty for that access. Staff say it is required, among other things, to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of that business activity.
The Commission adopted this branch so that all orders that enter an ATS, from broker-dealer and non-broker-dealer subscribers alike, flow through broker-dealer risk management controls subject to the rule.
On an exchange the gap never opens. The release says the Securities Exchange Act requires exchange members to be registered broker-dealers.
What an ATS is, and how an ATS differs from an electronic communications network (ECN), is covered in the unit on display, execution and trading systems.
Exam Tip: Gotchas
- An ATS operator with only broker-dealer subscribers owes nothing extra under this branch. The subscribers, not the operator, carry the duty for their own non-broker-dealer customers.
What Should You Check on Exam Day?
- Trace the order path first: through the firm's trading systems is generally direct market access, around them sponsored access.
- Look for missing pre-trade filters before calling an arrangement unfiltered or naked; that is what separates it from ordinary sponsored access.
- Confirm the firm whose identifier carries the order is the one answering for the trading, whatever the arrangement is called.
- On an ATS operator scenario, ask whether any subscriber is a non-broker-dealer; if none is, the operator owes nothing under that branch.
- Reject any choice suggesting the rule permits unfiltered access, since pre-trade controls are required for every arrangement.