DEFINITION OF NAKED ACCESS

This is taken from Stan Correy’s interview with Bernard Donefer

Naked access is as follows: If I want to send my order to the New York stock
exchange or to any exchange, an electronic exchange to any place I want to
send it to, as a customer as an institutional customer or as a retail customer, I
have to send it to my broker. And my broker who is a member of the exchange
routes it to the exchange. My broker has the requirement to check my order to
make sure it’s valid, that I can pay for the order, that I have money in the
account and that I’m not doing anything illegal in doing this trading. So they
have this risk management function. Naked access says they give permission to
the customer to by-pass the risk management system and use their name and
send the order directly to the market place - bypassing their infrastructure. In
turn the order goes down much much faster, so it allows high frequency trading.
The risk is, it by-passes any risk management system. So if there is a trader
using naked access who is having a trouble with their algo, their model
whatever, they don’t have anybody to stop them. They’re able to go directly
and bypass their broker. That’s naked access. My recommendation is that it be
eliminated. It’s also my belief that a lot of these firms, that are using naked
access in order to maintain their high speed connection, will convert themselves
to broker dealers and then be under the regulatory oversight of the SEC and the
other regulators and be able to do the same kind of trading, but they’ll be
regulated and I’ll be much more comfortable and happier.