What Are Approved Participants?
Approved participants are typically institutions that are allowed direct access to an exchange's trading environment. Approved participant status usually affords trade execution cost savings and the right to install trading terminals with direct access to the exchange. This allows the institution to bypass third parties, which may mark up the cost of the trades or cause delays in order execution since it is going through multiple parties before reaching the exchange.
- An approved participant is one who is allowed to access an exchange directly for trading.
- In order to be an approved participant, certain qualifications and regulatory thresholds must be met.
- Each exchange or jurisdiction will have its own rules on who can be an approved participant, along with the rights and responsibilities granted to them.
Understanding Approved Participants
Approved participants must meet certain eligibility requirements as determined by the respective exchange. For example, to become an approved participant on the New York Stock Exchange (NYSE), called an Equity Member in this case, the firm must be a U.S. based broker-dealer, who is governed by a Self Regulatory Organization (SRO), and that has a clearing firm. Once membership is accepted, then the firm is allowed to connect directly to the exchange for pricing data and order placement.
Authorized person forms must also be filled out by authorized participants/exchange members. Authorized persons are the people who work for the approved participant and that will be working directly with the exchange.
Approved participant status may vary by exchange. The Montreal Exchange, in Canada, requires firms to be formed in Canada, be a member of an SRO, be or become a member of a clearing corporation, and employees of the approved participant who trade on the exchange must first take a training course. Foreign firms must be legally formed in their resident country, be registered with a regulator, have a clearing agreement with a Canadian clearing corporation, and have an agent residing in the province of Quebec, Canada.
Approved participants must report to the regulatory organization, and by extension the exchange, any changes in their name, change of control, or a merger or acquisition that affects the institution.
Benefits to Approved Participants
Since each exchange is different, the benefits and associated costs will vary.
For example, on the NYSE, advantages include ultra-low latency execution of orders, including the ability to co-locate trading servers next to exchange servers. Access to advanced order types and dark pools. Rebates on trades for adding liquidity (as opposed to executing against orders that are already there), and a further reduction in costs for meeting volume thresholds. Approved participants also have access to opening and closing auctions.
Approved participants on all exchanges enjoy cost savings on trades as a result of cutting out third parties, and have direct access to the exchange via installed connections.