Friday, April 16, 2010

I am not a number - unless I trade $20M a day

As the SEC proposes a new trading system that requires individuals or firms to register and receive a trader identification number if they plan to trade more than $20 million or 2 million shares per day. The aim is to allow better tracking of the activities of individuals and firms. In doing so, the SEC is reinforcing the concept that an client's activities are reflected by their overall actions, not just the transactions in a single account. This is not always the way securities firms view, or have viewed their clients.

Of course, at a fundamental level the transactions within an account are what are of most interest to a firm. The account defines what a client can do, what their limits are, and what stock they hold. But from a compliance and risk level, surely it is the health and overall activity of a client that makes more sense. If a client is close to bankruptcy, it may only be the aggregate of all accounts that indicates this, rather than any one item. If there is a risk of insider dealing, perhaps it is only the spread of transactions across accounts that would give this away. Clients with seriously nefarious intentions are unlikely to be dumb enough to not try and obscure what they are doing, and spreading activity across accounts in firms that don't pay close attention may allow them to do this.

Even at a day to day level, having a single view of a client is better than a per-account view. It allows simplified compliance around proof of identity, it allows better opportunities to advise the client well and holistically, and it shows that you really know your customer, not just the stove-piped accounts they hold.

Will the SEC's proposal really help them identify dodgy-dealing? Maybe, or maybe not. But if the SEC can have a single view of a trader, perhaps it is time for the firms executing their instructions for trading to do the same.

A post from the Improving It blog

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