We've suggested before that sponsored access is a huge issue [1] that seems to have been shunted off to the periphery of the high-frequency trading discussion. Lime Brokerage put the issue on the map a bit more prominently with its much-discussed comments to the SEC, and the issue seems to be drawing a bit more attention. 

Advanced Trading notes that sponsored access has "been around for seven years," but it is drawing lots of new scrutiny [2] because of the potentially lethal combination of sponsored access and high-frequency trading. What if a hi-fi buys-die outfit, operating under the ID of its hi-fi friendly broker-dealer, submits a blizzard of faulty or even fraudulent orders directly into a market center's systems. It could really wreak havoc. Especially in light of the fact that canceling or undoing those trades is very difficult, if not impossible in a short amount of time. 

So the issue of whether there ought to be some pre-trade control that is the responsibility of the sponsoring broker-dealer is critical. Lime Brokerage uses the term Naked Access to refer to sponsored access with no pre-trade risk controls. It's unclear how widespread this practice is. But it may be at uncomfortable levels already. 

The good news is that we're sponsoring a free editorial webinar on hi-fi trading [3], which will offer a good chance to learn much more about the state of affairs. We'll feature two leading lights in the field: Kevin McPartland, of the Tabb Group, whose reports on this and related topics are really must-reads, and George Hessler, executive vice president of Lime Brokerage, a pioneering firm in this field. He'll address some of the regulatory implications. The free event will be held at 2 PM on Sept. 10. - Jim [4]