The Securities and Exchange Commission's latest salvo in the war against market instability could mean higher trading fees for money managers and some smaller equity trading venues curtailing operations or shutting down completely.
The SEC's Regulation Systems Compliance and Integrity, or Reg SCI, would require all trading venues — exchanges, automated trading systems and dark pools — to submit alternative plans for operations in the event of a system breakdown. It also would require regular testing by the venues to ensure those alternative plans would work.
Now, those emergency systems are not required by the SEC.
The agency is expected to release a final proposal for the regulation this month with a final vote by commissioners in October.
“The exchanges will have to pay for the testing, and that will be passed on to the execution firms, the brokers,” said Christopher Nagy, founder and CEO of market structure research firm KOR Group LLC, Omaha, Neb. “And there will be significant costs. It'll raise the bar for cost to entry, and certainly could and likely will reduce the number of (automated trading systems) and smaller brokerage firms. More ATS independents will have much more trouble from a cost perspective.”
“This is another level of insurance, and someone will have to pay for it,” said Henry Yegerman, director of trading analytics and research at financial data provider Markit Group Ltd., New York. “Initially the sell side (venue operators, for example) will pay, but the question is, will this be extended eventually to the buy side and the original asset owner. The sell side is already financially stressed by regulations.
“Trading is the cash register by which the buy side pays for research,” Mr. Yegerman added. “This new added cost will go to the traders, who'll pass it on to the buy side.”
The SEC in its proposal said the estimated initial cost for organizations subject to the Reg SCI would be up to a collective $242 million, with another $191 million in annual costs.