Regulators Eyeing HFT in U.S., U.K.
by Paul Springer
The breathtaking speed of high-frequency trading may hit a speed bump in the form of securities regulation, a process known for moving at a much slower pace.
While the markets have remained orderly despite extreme volatility in August, people are wondering if HFT is really the boon to liquidity that it’s adherents claim.
In the U.S., the Finanical Industry Regulatory Authority is taking a granular look at some trading strategies, and not just the general nature of the trading. The regulator wants to look at specific algorithms.
Reuters says that both FINRA and the Securities and Exchange Commission are looking at HFT:
According to interviews with attorneys, traders, industry executives and regulators, the unusual requests for algo code and other computerized trading strategies really ramped up this year and have targeted stock-trading firms such as broker dealers and hedge funds.
Proprietary codes are at the heart of HFT – as is keeping them secret. In the last year, at least two people were sued for taking code with them to new employers. And now traders are not pleased with the idea that regulators could latch on to valuable algos.
One source told Reuters that the SEC’s revolving-door policy could allow secret codes to fall into the wrong hands:
“I’d be disappointed and upset” if they asked for code, said a high-frequency trading firm executive who declined to be named. “I mean, are these people all going to work at the SEC forever?”
It’s not clear who is being examined at this point. The Financial Times reports a somewhat hazy account from FINRA:
Tom Gira, executive vice-president of Finra’s market regulation unit, told FT Trading Room that requests for information were usually in response to complaints from market participants. “We’re doing it because there is a reason,” he said. “We run a lot of surveillance platforms and we get complaints too. We have some active investigations right now.”
Bloomberg got hold of a document that indicates the European Union is also contemplating enhanced scrutiny:
The requirements will include safeguards to prevent high-frequency trades from “overloading the systems of trading venues,” generating “erroneous orders” or “otherwise malfunctioning” in a way that may create a disorderly market, according to the document.
In the U.K., the Financial Services Authority has frozen one trading group’s assets as part of an investigation of spoofing, or placing fake orders to manipulate markets, The Independent says. While spoof orders are pulled before they can execute, placement of the orders distorts pricing to the advantage of unscrupulous traders.
That particular enforcement may not have involved HFT – anybody can spoof – but the FSA did censure another firm the day before. This time there were a lot of trades, and the regulator alleges that Swift Trade improperly layered (spoofed) trades and changed its trading activities to avoid detection.
Swift also allegedly used Direct Market Access to manipulate markets. Swift, however, was not swift enough to avoid a £8 million ($13 million) fine for the trades, which took place in 2007 and the first few days of 2008.
Swift is challenging the FSA’s decision.
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