New SEC Rule Will Require Major Liquidity Providers to Register as Dealers

The Securities and Exchange Commission finalized a rule Tuesday that will require market actors that engage in “significant liquidity-providing roles” to register with the SEC and the Financial Industry Regulatory Authority as securities dealers.

The rule will apply to organizations that regularly engage in trading on both sides of a market for the same security in a manner that makes the security accessible to others. It will also apply to those that earn “revenue primarily from capturing bid-ask spreads.”

The SEC stated that electronic trading has encouraged the growth of unregistered market actors that provide liquidity, when historically that role has been provided by registered dealers. The rule excludes market participants with less than $50 million in assets.

Jay Gould, a special counsel with Baker Botts, says the rule “reaches a pretty narrow set of people,” since many actors involved in liquidity markets are already registered with the SEC. He explains that the target of the rule is likely certain hedge funds that trade Treasurys but do not report certain data to the SEC.

The SEC “wants transparency into these liquidity transactions to understand the scope of the market,” Gould says, so the regulator can understand which actors are providing it and in what amounts, which can help the SEC assess systemic risk through more thorough data collection.

He adds that the rule is consistent with other SEC rules designed to create more transparency in liquidity markets, such as a rule finalized in December 2023 that requires more secondary Treasury transactions to be centrally cleared.

The rule will take effect 60 days after it is entered into the Federal Register.