With last May's "flash crash" still heavy on their minds, the SEC is on the verge of banning a process called "naked access," in which brokerages permit their customers to trade on their computer codes without oversight. While brokers use risk controls and algorithms to prevent automated trades from spinning out of control, their clients are under no such obligations.
It's important to realize who the brokerage's customers are, the ones the SEC are concerned about. It's not some guy making trades out of his basement; more likely, it's what's known as quantitative trading firms. These are firms who buy and sell stocks based solely on what their computer algorithms are telling them to buy, which means they have a tremendous advantage if they're not limited by the broker's customary controls.
This is a huge business. By one estimate from earlier this year, naked access accounts make up nearly 40 percent of all stock trades. While eliminating this type of trading would reduce the possibility of enormous, instantaneous drops in the market, it's anyone's guess what other effects it might have.
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