FBI And SEC Team Up To Take Down HFT
After exposing the stock market manipulative arsenal that is High Frequency Trading, quote stuffing, flash trading, packet churning, layering, sub-pennying, liquidity, latency and dark pool arbitrage, NBBO and Reg NMS exemptions, "hide-not-sliding", collocation, and much, much more for four years, or so long even Credit Suisse joined the chorus we started in April of 2009, we are glad to learn that finally, with a ridiculous Rip Van Winklesian delay, but better late than never, "the FBI has teamed up with securities regulators to tackle the potential threat of market manipulation posed by new computer trading methods that have taken operations beyond the scope of traditional policing."
In other words, the SEC has finally realized it can no longer pretend it is not co-opted, but because it has no clue where to even start with HFT, has asked the help of the Feds. Which in itself is hardly reason for optimism, but if there is one thing Hans Gruber has taught us, it is that when the Feds get involved, the first thing they do is cut the power, and in this algo-based market that will end some 99% of all daily manipulative practices we have all grown to love and look forward to every single day.
FBI agents have joined forces with a new unit within the Securities and Exchange Commission that examines hedge funds and other firms that are using algorithm trading strategies.
The SEC’s Quantitative Analysis Unit is focusing on the emergence of high-frequency trading firms and the rise of dark pools. Traders using these methods can manipulate the market by flooding it with quotes, known as quote stuffing, or placing millions of orders that are quickly cancelled, to drive others to trade in ways that benefit their position, a practice known as layering.
Some of these trading strategies have been accused of destabilising the market and putting retail investors at a disadvantage. Their supporters have said they increase liquidity in securities and reduce volatility.
Accused? Obviously the author of this story has never actually, what's the word, traded, submitted a VWAP or any other market-based order.
There is a reason the NY Fed works with HFT-giant Citadel: it is precisely to facilitate what HFT is "accused" of doing. But one can't go and expose all the manipulated secrets that have sent this fake market to even faker all time highs.
Authorities are exploring potential holes in the system, including new algorithms referred to as “news aggregation” which search the internet, news sites and social media for selected keywords, and fire off orders in milliseconds. The trades are so quick, often before the information is widely disseminated, that authorities are debating whether they violate insider trading rules, the people familiar with the matter said.
Authorities are also monitoring alpha capture systems, platforms where sell-side firms share information with buyside professionals, for potential front running or insider trading. Also on their radar is artificial intelligence trading, an algorithm that predicts market reactions based on history.
One can see it already: "it was all Twitter's fault."
Nonetheless, there is at least a trace reason to be hopeful:
One government official said market structure could be the next big area for cases, although it was not clear whether any of the strategies violated criminal laws. To prove a criminal case the FBI would need to show that the trader intended to manipulate the stock, which could prove more difficult for strategies that are triggered by computers.
The hope is not from the SEC or FBI actually putting someone behind bars, as this proves...
The SEC has brought a handful of cases involving these strategies and other investigations are under way. No criminal case is on the horizon, one of the people said.
... But at least neither the Feds nor the SEC will be able to plead ignorance when confronted with the same knowledge that our readers had back in 2009.
Then again, by the time the two agencies catch up to what anyone with half a frontal love and an interest in the stock market knows already, the Dow will be either at 36,000 or 0, or in other words, too late.