The Next Big Worry: 'Naked' Access with High Speed Trades

Regulators are now honing in on David Lightman and his friends, the bad guys that use high-frequency trading known as naked access, which allows large traders to trade directly on exchanges using their broker's "market participant ID," leaving exchanges in the dark as to their identity. While "flash orders" raised concerns over fairness, here regulators are worried cascading rapid-fire orders could destabilize markets.

Federal securities regulators are examining whether an arrangement that lets high-speed traders rapidly buy and sell large chunks of stock anonymously could go awry and threaten markets.

Called sponsored or "naked" access, the setup allows high-speed firms and other outfits to trade directly on exchanges using powerful computers without the exchanges or regulators knowing who is making the trades.

"We understand that some firms are offering so-called naked access without effective controls over financial regulatory risk," said David Shillman, associate director of the Securities and Exchange Commission's division of trading and markets, which is stepping up its scrutiny of the...

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