As many series 24 test takers know, the exam will challenge you to master the supervision of trading and market making down to the smallest detail. Here is some great information on direct market access and rogue trading prvention to help you on this difficult section. This information is taken right from our series 24 textbook.
What is Direct Market Access?
Broker dealers who have direct market access, who provide direct market access to customers through the firm’s MPID, or who provide sponsored access to customers, must maintain strict financial risk and supervisory control systems for firm employees and customers who have direct market access. Direct market access is defined as access to trade securities on an exchange or through an alternative trading system as a result of being a member or subscriber. A broker dealer who provides a non-broker dealer customer with access to an alternative trading system will be deemed to have provided direct market access to that customer. The financial controls required for such access include:
• The risk management controls and supervisory procedures must be reasonably designed to systematically limit the financial exposure of the broker dealer that could arise as a result of market access.
• The risk management controls and supervisory procedures must be reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds in the aggregate for each customer and the broker or dealer and, where appropriate, more finely-tuned by sector, security, or otherwise by rejecting orders if such orders would exceed the applicable credit or capital thresholds
• The risk management controls and supervisory procedures must be 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 duplicate orders.
The risk management controls and supervisory procedures shall be reasonably designed to ensure compliance with all regulatory requirements, including being reasonably designed to:
• Prevent the entry of orders unless there has been compliance with all regulatory requirements that must be satisfied on a pre-order entry basis.
• Prevent the entry of orders for securities for a broker or dealer, customer, or other person if such person is restricted from trading those securities.
• Restrict access to trading systems and technology that provide market access to persons and accounts pre-approved and authorized by the broker or dealer.
• Assure that appropriate surveillance personnel receive immediate post-trade execution reports that result from market access.
What is Rogue Trading Prevention?
The actions of bad actors on a trading desk can have significant financial repercussions to a firm and to the integrity of the market as a whole. A broker dealer is required to ensure that it has established the proper supervisory systems to detect and prevent the actions of potential rogue traders. Several firms have collapsed as a result of traders hiding significant losses from the firm. Part of the checks and balances require that traders and other persons in sensitive positions take a mandatory vacation every year. These vacations must be for a minimum of 10 consecutive business days. A trader who says he / she does not want to take a vacation is a red flag that the trader may be hiding losses from his / her firm. The firm should keep information regarding its monitoring systems confidential from those who are being monitored so the systems may not be bypassed. Additionally, only authorized persons should have access to the firm’s trading systems and the use of multiple passwords should be required for sensitive systems.
Good Luck on your series 24 exam
The Securities Institute