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Originally published Wednesday, January 13, 2010 at 9:00 AM

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SEC proposes broker rules to curb disruptive error

Federal regulators on Wednesday proposed new requirements for brokerage firms aimed at reining in risk from their trading customers who get split-second access to markets to buy or sell stocks.

AP Business Writer

WASHINGTON —

Federal regulators on Wednesday proposed new requirements for brokerage firms aimed at reining in risk from their trading customers who get split-second access to markets to buy or sell stocks.

The Securities and Exchange Commission voted 5-0 to open the proposal for public comment for 60 days.

At issue is so-called "unfiltered" or "naked" sponsored access, in which brokerages that are approved to trade on exchanges rent out their access to them to unregulated clients such as high-frequency traders. They use mathematical models to exploit market imbalances and minute price differences.

SEC officials said an estimated 38 percent of the daily trading volume in stocks and bonds on U.S. markets involves naked sponsored access.

Regulators say they are concerned about potential risks, including the possibility that electronic errors at high speeds could ripple through markets and disrupt them. They say new rules also could help level the playing field for market players and bring order to a patchwork of regulations that are about a decade old.

The proposed rule would require brokerages to put in place controls to reduce risk from their sponsored trading customers stemming from erroneous orders. Credit limits for trading orders would have to be respected.

SEC Chairman Mary Schapiro said she views unfiltered access as akin to "giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied."

The proposed rule would require that if a broker is going to loan his keys to a trading customer, "he not only must remain in the car, but he must also see to it that the person driving observes the rules before the car is ever put into drive," Schapiro said before the vote.

It was the latest in a series of moves by the SEC regarding quickly evolving markets, as the regulators have examined whether ordinary investors are unfairly disadvantaged by trading systems that don't publicly provide price quotes and other trading practices.

Last fall the agency proposed new rules for so-called dark pools that would require more stock quotes to be displayed as well as a ban on flash orders - which give traders a split-second edge in buying or selling stocks.

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