Sponsored access and DMA: Predicting the next blow up
I went to SunGard’s City Day conference in London recently. This used to be called the GL NET Forum and while not FX-specific, it is a great opportunity to catch up with old contacts and find out about the issues and developments in other markets. I firmly believe that keeping an eye on what is going on elsewhere facilitates understanding of what is happening closer to home.
There were numerous good discussions. One in particular was both fascinating and horrifying – it was on the difference between sponsored and direct market access (DMA). As he introduced the session, Dave Mishoe, managing director of SunGard Institutional Brokerage, said he believed this was the first time the topic had ever been discussed in Europe, so it was important to define what the distinction is.
Essentially, sponsored access differs from DMA because the broker or bank providing connectivity does not place any pre-trade layers on the line. This reduces latency, which is obviously important to certain market participants. However, it means there is no risk management in place. The sponsoring institution has to satisfy itself that the end client has adequate risk management systems and relies on receiving instantaneous confirmations from the trading venue. Mishoe said sponsored access is proving popular in the US, but that he himself was wary about replicating the concept in Europe.
As we all know, many things have proved popular and successful in the US, but have later proved disastrous. Someone really should stop the US exporting its weapons of financial mass destruction, as well as its draconian and misplaced regulations, around the globe. Panel moderator Nikki Beattie, president of Market Structure Practice, said that the UK’s Financial Services Authority had serious misgivings about sponsored access. On this one it seems the regulator has got something right for a change.
There is no known check that identifies a rogue trader before he becomes a rogue. Apparently, sponsored access is safe because the trading venue sends an instantaneous confirmation to the sponsor every time a deal is transacted. But as Antonio Reyes Miras, global head of cash equities and futures and options at JPMorgan, pointed out in the session on front-office risk management, some of his clients fire in as many as 1,000 orders per second. He says it takes at least two minutes to identify a problem. In that time, huge exposure can be initiated.
It is almost inevitable that sponsored access will grow in popularity as brokers and banks seek business. Apparently many tier 1 players who really should know better already are providing it. I sincerely hope it does not migrate to FX – it is an accident waiting to happen.