Sponsored Access

Sponsored access is at its worst when linked to high-frequency trading, but some believe the practice can create conditions for systemic risk in its own right. The Aite Group, an independent research firm for the financial services industry, recently released a report [1] describing how the elimination of broker-dealer oversight initiated by sponsored access agreements could allow for "rogue traders" to make certain shoddy deals which--granted this is unlikely--could put the whole market at risk.

High-frequency trading, however, poses the real threat, as the Wall Street Journal [2] reports. The Aite report acknowledges that "fat finger" trades, or the literal punching in of incorrect figures when making trades, are the extent of human error when it comes to sponsored access. But automated market-reading algorithms present an entirely new level of risk, precisely because they're automated.

Sponsored access is beneficial for HFT because it literally removes the broker-dealer from the trading process. This gives the participant direct access to the market and, in the case of "naked" access, removes the hurdles of real-time risk checks [3]. This is attractive for HFTs not because it ducks regulation, but because it provides additional speed--skipping these requirements can shave microseconds off trades and increase profitability. A further stripping-down of oversight for automated trading can only amplify the risks involved.