iOn March 25, 2015, the SEC proposed an amendment to Rule 15b9-1 that would require high-frequency trading firms to register with FINRA. According to the SEC, the proposed amendment will better align the scope of Rule 15b9-1 with today’s market structure.
Rule 15b9-1, as presently written, exempts certain market participants from the requirement under the Securities Exchange Act that broker-dealers become a member of a registered national securities association. Specifically, Rule 15b9-1 exempts broker-dealers from the membership requirement if they (1) are a member of a national securities exchange, (2) carry no customer accounts, and (3) derive $1,000 or less in gross annual income from securities transactions conducted outside of a national securities exchange of which they are a member (the “de minimis allowance”). Under the current Rule, income derived from trading for the broker-dealer’s own account with other broker-dealers does not count against the $1,000 limit.
Thus, high-frequency traders that engage in off-exchange trading for their own accounts typically are not required to register with FINRA under the current rule and are not subject to FINRA’s comprehensive regulatory regime. Given the substantial transformation of the market structure to include a wide variety of trading venues and high volumes of algorithmic trading, the SEC now believes that firms engaged in high frequency trading across trading venues should be subject to FINRA’s regulation, including broker-dealer examinations, broker-dealer disclosures and rules governing broker-dealer conduct.
The SEC’s proposed amendment would replace the current de minimis allowance with a more narrowly-tailored exemption to the general registration requirement. The new exemption would be limited to broker-dealers that are members of a national securities exchange, carry no customer accounts, and which effect off-exchange transactions (1) solely for the purpose of hedging the risks of floor-based trading activity, or (2) based on orders routed by a national securities exchange so as to comply with Regulation NMS. Broker-dealers which engage in high-frequency trading across different venues typically would not come within this exemption.
