A report says that 38 percent of all U.S. stock trading is now done by firms that have naked sponsored access to markets, the controversial trading practice said to imperil the marketplace, and which faces a regulatory crackdown.

Naked access gives trading firms, using brokers' licenses, unfettered access to stock markets. The firms, usually high-frequency traders, are then able to shave microseconds from the time it takes to trade.

Aite Group, a Boston consultancy, found that naked access accounted for just 9 percent in 2005.

The U.S. Securities and Exchange Commission is set to make changes to naked access and less risky forms of so-called sponsored access, when it releases a document expected next month.

The document is also expected to look more generally at high-frequency trading -- where proprietary trading firms, brokers, and others use algorithms to make markets and profit from narrow market inefficiencies.

Sang Lee, managing partner specializing in market structure at Aite, wrote in the report that the industry now expects the SEC to adopt market-wide standards for monitoring sponsored access, and that it was likely naked access would be banned for non-broker-dealers.

The idea here is to level the playing field so that no one segment of the market has a clear advantage caused by lack of industry uniformity in risk checks, Lee wrote.

Overall sponsored access, including both naked and what Aite called filtered access, which gives the sponsoring broker more monitoring and safety valves, accounts for half of all U.S. equity volume, the report said.

Filtered access, which is slower and more costly than naked access, has grown only slightly over the last four years, said Aite, citing trading venues, brokers, vendors and trading firms, as well as in-house estimates, for its data.

Naked access is not allowed in Europe. But filtered access is about 12 percent of daily European trading volume, and Aite forecast it would reach 40 percent by the end of 2012.

ONE CORNER OF COMPLICATED MARKETPLACE

The report sheds light on one corner of the marketplace as regulators ponder whether some investors enjoy undue advantages over others. The SEC has already proposed banning so-called flash orders and make anonymous venues known as dark pools more transparent.

There is no industry-wide standard for brokers. While firms such as Wedbush Morgan and Penson Financial provide naked access, bigger brokers such as JPMorgan Chase & Co and Goldman Sachs Group Inc only provide filtered access.

Any new rules could redirect the flow of fees and volumes.

Aite said it expected the SEC to adopt uniform pre-trade and real-time risk checks; minimum capital requirements; auditing; stiff fines and penalties; and a long-term plan for the main U.S. clearinghouse to provide post-trade risk checks, as Reuters first reported in October.

Amit Manwani, managing director of Nomura Holdings Inc's <8604.T> equities division in New York, told reporters last week the risk of a naked access-inspired foul up was remote, but not impossible.

Just because...your neighbor is not going to rob your house, you're not going to leave your door unlocked, he said, noting Japan-based Nomura does not provide naked access. You just need a little bit of checks and balances in the system.

(Reporting by Jonathan Spicer)

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