What Market Access Is and Which Firms It Binds

The market access rule is a controls rule. It requires a firm that has market access, or that provides a customer or any other person with access to an exchange or alternative trading system, to build controls around the rules that already apply to those orders. It is intended neither to expand nor diminish those underlying requirements.

What Does "Market Access" Mean?

The market access rule defines the term in two branches joined by "or", so a firm needs only one of them.

• Access as a member or subscriber. Access to trading in securities on an exchange or alternative trading system (ATS) as a result of being a member or subscriber of the exchange or alternative trading system, respectively.
• Access an operator gives a non-broker-dealer. Access to trading in securities on an ATS provided by a broker-dealer operator of an ATS to a non-broker-dealer.

The word "respectively" pairs each status with its venue: a member of the exchange, a subscriber to the ATS. Only the first branch turns on membership or subscription at all.

The SEC added the second branch because a firm that operates an ATS and lets non-broker-dealer participants trade on it would not have been covered by the first. As the adopting release puts it, that access "would not result from that broker-dealer being a subscriber to the ATS, but rather from its being the ATS operator."

Exam Tip: Gotchas

• The second branch has no member or subscriber test. It turns on the operator relationship, so an ATS operator can owe the duty for a participant it never treats as a subscriber of anything.
• The second branch reaches only a non-broker-dealer. Where an operator provides that access to a broker-dealer, the operator is not brought in by this branch.

Which Securities and Which Activities Does the Rule Reach?

The release says the term was "intentionally defined broadly". It covers direct market access and sponsored access offered to customers, and also the firm's trading for its own proprietary account and its more traditional agency activities.

On products, the release states that the rule "will apply to trading in all securities on an exchange or ATS", naming five kinds as examples: equities, options, exchange-traded funds, debt securities, and security-based swaps. The list is introduced by "including", so it illustrates rather than closes.

The controls must be reasonably designed, and the release says the rule "does not employ a 'one-size-fits-all' standard for determining compliance". Details vary from firm to firm, depending on the nature of the business and customer base, so long as they are reasonably designed to achieve the rule's goals.

The release's own illustration: a firm that only handles retail order flow may develop different controls from a firm that mostly services order flow from sophisticated high frequency traders.

Flexibility is not a lower bar for the proprietary and traditional agency side. The Commission says that in many such cases the rule "should be substantially satisfied by existing risk management controls and supervisory procedures already implemented by broker-dealers", but the rule still applies to that activity.

Exam Tip: Gotchas

• The five product kinds are examples, not a closed list. A choice that treats equities, options, exchange-traded funds, debt securities and security-based swaps as the complete universe misreads the word "including".
• Proprietary trading sits inside the rule, not outside it. The Commission expects existing controls to satisfy much of the duty there, which is not the same as excusing the activity.

Which Firm Owes the Duty, and What Must It Build?

The duty falls on a broker or dealer with market access, or that provides a customer or any other person with access to an exchange or ATS through use of its market participant identifier (MPID) or otherwise. The second limb is written to catch the arrangement by its substance, whatever it is called.

That firm must establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of this business activity. The release gives legal and operational risks as examples of the "other risks", not as the whole of them.

The firm must also preserve two things as part of its books and records: a copy of its supervisory procedures, and a written description of its risk management controls.

Both are preserved in the compliance, supervisory and procedures manual category of the records retention rule, which keeps that manual, with any updates, modifications and revisions, in an easily accessible place until three years after the termination of its use. Books and records generally are covered in the unit on creating, retaining and reporting required records of orders and transactions.

The rule reaches the firm with market access, not every firm in the chain. The Commission emphasizes that "the Rule is applicable to the broker-dealer with market access, not every broker-dealer in a market access arrangement", and that the rule "does not require multiple layers of pre-trade controls for any order".

Exam Tip: Gotchas

• Two things get preserved, not one. The supervisory procedures and a separate written description of the risk management controls both go into the books and records.
• A firm can owe the duty without having access itself. The second limb reaches a firm that provides a customer or any other person with access through its identifier or otherwise.

What Are "Regulatory Requirements" Under the Rule?

The rule defines regulatory requirements as all federal securities laws, rules and regulations, and rules of self-regulatory organizations (SROs), that are applicable in connection with market access.

The release limits the term twice. It "references existing regulatory requirements applicable to broker-dealers in connection with market access", and the rule "is intended neither to expand nor diminish the underlying substantive regulatory requirements otherwise applicable to broker-dealers".

The phrase "in connection with market access" is the second limit. Requirements not connected with a firm's having or providing access as a member or subscriber fall outside the rule's scope.

The release gives two examples of rules whose compliance procedures the Commission would not expect a firm to formally reassess in response to this rule: rules relating to trading in the over-the-counter market other than on an ATS, and rules relating to the delivery of customer account statements.

The content of the term also moves. The release notes that what counts as a regulatory requirement adjusts over time as laws, rules and regulations are modified.

The rule sits beside the rulebooks rather than replacing them. The release says it is intended to complement and bolster existing rules and guidance issued by the exchanges and FINRA with respect to market access.

Exam Tip: Gotchas

• SRO rules are inside the definition. A choice limiting regulatory requirements to federal securities laws, rules and regulations drops the second half of the sentence.
• The rule imposes no new substantive regulatory requirement of its own. It requires controls around requirements that already exist, and it neither expands nor diminishes them.

When Is a Routing Broker Excepted?

A broker-dealer that routes orders on behalf of an exchange or ATS, for the purpose of accessing other trading centers with protected quotations, in compliance with the order protection rule for national market system (NMS) stocks or in compliance with a national market system plan for listed options, is not required to comply with the market access rule with regard to such routing services.

The exception carries one carve-back written into the rule itself: it applies except with regard to the erroneous-order control. The routing broker still needs controls reasonably designed to prevent the entry of erroneous orders, by rejecting orders that exceed appropriate price or size parameters, on an order-by-order basis or over a short period of time, or that indicate duplicative orders.

The Commission's reason is that a routing broker in that position "necessarily would only handle orders that have just passed through broker-dealer risk management controls" subject to the rule.

The release narrows the exception on three axes.

Where routing services are not limited to order-protection compliance, the release says they may involve a more complex process with new decision-making by the routing broker, and there the routing broker should be fully subject to the market access rule. The order protection rule itself is covered in the unit on Regulation NMS.

Exam Tip: Gotchas

• The erroneous-order control survives the routing exception. Everything else lifts for those routing services, including the credit and capital control, but the erroneous-order requirement stays.
• Directed routing for a venue's customers is outside the exception. The exception is tied to the venue's own order protection or listed-options-plan compliance, not to routing generally.

Who Falls Outside the Rule?

The SEC Division of Trading and Markets has published responses to frequently asked questions on this rule. Those responses read the rule to reach only the firm with access, or providing access, as a member or subscriber, together with the broker-dealer operator of an ATS that gives a non-broker-dealer access to it.

Staff read the product line the same way. The rule covers all securities, including any security futures, traded on an exchange or ATS, and it does not apply to any futures contracts or options on futures contracts.

Falling outside the rule is not the same as losing every duty. Staff say the rule does not change the existing responsibilities of entities it does not reach, such as a clearing broker with no market access, provided that an entity's responsibilities do change if a firm with market access allocates regulatory responsibilities to it under the rule.

What Should You Check on Exam Day?

• Ask which branch of the definition the scenario uses: member or subscriber status, or a broker-dealer operator of an ATS providing access to a non-broker-dealer.
• Confirm the firm named is the one with access or providing it; a clearing broker with no market access is outside the rule.
• On a routing-broker scenario, lift the market access rule's own requirements except the erroneous-order control, only for order-protection or listed-options-plan routing, and note an exchange member still follows that exchange's rules.
• Read "regulatory requirements" to include self-regulatory organization rules, limited to those applicable in connection with market access.
• Check that both the supervisory procedures and a written description of the controls are preserved, not just one.