CFTC Investigates The "Secret" HFT-Exchange Incentive Programs

Tyler Durden's picture

It would appear that yesterday's announcement by NY AG Schneiderman (who appeared to find Virtu's practically flawless trading record too much to bear) has prompted further investigations into HFT shenanigans by regulators. As WSJ reports, regulators are taking aim at the relationship between high-frequency trading firms and major exchanges, examining whether the preferential treatment market operators offer the firms puts other investors at a disadvantage. The CFTC probe is focused on complicated, often opaque incentive programs that give high-volume trading firms financial benefits such as discounts on fees the exchanges charge to execute trades.



Via WSJ,



The Commodity Futures Trading Commission is investigating deals between large high-speed firms and the two futures-exchange operators, CME Group  and IntercontinentalExchange Group according to people familiar with the matter.




Separately, Securities and Exchange Commission enforcement officials are investigating whether stock exchanges provide advantages to certain clients, including high-frequency traders, by designing software programs that can give preferential treatment to their orders, and whether such details have been fully disclosed, people familiar with that inquiry said.




Regulators are concerned that less-savvy or less-influential investors aren't aware of the benefits and advantages that exchanges are providing to certain clients, making it difficult for them to compete fairly, according to people familiar with the investigations.




So far, market watchdogs have done little to curb such trading, which has boomed and now makes up about half of all stock-market volume.




The CFTC probe is focusing on contracts tied to high-volume commodities such as crude oil, among other trading, and whether exchanges are pressuring some clients to trade such contracts exclusively on their venue, according to the people familiar with the probe. It also is targeting deals struck privately between exchanges and trading firms that aren't disclosed to other trading outfits.


"There shouldn't be secret deals," said Mark Gorton, chief executive of Tower Research Capital, a U.S. high-frequency trading firm. "The big players shouldn't have better rates than the little players."


Among the firms in focus are New York high-speed giant Virtu Financial Inc., which last week disclosed in a regulatory filing that the CFTC is "looking into our trading during the period from July 2011 to November 2013 and specifically our participation in certain incentive programs offered by exchanges or venues during that time period."




Defenders say such programs help boost the number of orders on the exchanges, making it easier for other investors to buy and sell futures contracts... But, the CFTC's concerns is that the programs can encourage traders to engage in strategies that boost volumes but harm other investors.

Yet another worrying risk for the Virtu IPO... but then again, as long as it doesn't IPO in Japan (like Japan Display's terrible opening last night) the current exuberance will, we are sure, guarantee the greater fools will give the Virtu executives their exit at "peak HFT".


It appears the probes are working... (via WSJ),

Marketwired, a provider of news releases such as corporate earnings and economic data, has decided to stop providing the releases directly to high-frequency traders, according to people familiar with the matter.


Marketwired is expected to sign a deal to stop the practice with New York Attorney General Eric Schneiderman, who has stepped up efforts to crack down on abusive practices by high-frequency firms, the people said.


The news follows a decision last month by Berkshire Hathaway Inc. 's Business Wire to stop providing high-speed traders direct access to corporate earnings and other market-moving press releases following consultations with Berkshire Chief Warren Buffett and Mr. Schneiderman's office.


The ties between Marketwired, based in Toronto, and Business Wire were first reported in a Wall Street Journal article last month.

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Dollarmedes's picture

Eric Holder will never allow the cronies to suffer. This will go nowhere.

SoilMyselfRotten's picture

CFTC Investigates...


Glad they used those 2 words to start the article, made it so much easier to ignore.

pods's picture

Well all the animals are out of the barn, time to close the doors.


ParkAveFlasher's picture

I believe a ZHer offered the remedy in case some legal agency was interested in fairness ... that was to either charge by quote, and/or by trade, and/or penalize cancellations.

object_orient's picture

Still won't matter. Those "opaque" discounts to large volume and influential trading firms will continue. If not those, some other innovation that allows middle man skimming. Do you really think government regulators have the incentive and ability to catch up?

Canadian Dirtlump's picture

how providing the necessary liquidity of 14 quadrillion quotes to complete 1 transaction can be regarded as anything other than noble is frankly remarkable. We should be thanking these modern day pharisees.



Sleepless Knight's picture

I use to think an investigation would draw conclusions and find facts, now I have learned that they are just to jusitfy the investigating bodies existence - no more.

Kaiser Sousa's picture

the CFTC?

yeah,  theyll "shirley" get to the bottom of things...

say, how'd that investigation of blatant Gold and Silver manipulation turn out???

Crash Overide's picture

What's an investigation?

Is that when you invest in a government official to rig a market?

Silverhog's picture

In three years they will tell us they found nothing like Silver munipulation. 

Colonel Klink's picture

CFTC - Criminal Financial Theft Conspirators

exi1ed0ne's picture

Can't Fsking Touch the Criminals

slightlyskeptical's picture

Think if Putin was in charge of the CFTC he would be able to find any wrongdoing?

bullet's picture

Sargent Schultz ... (SEC - CFTC)  "I see nothing"...

Colonel Klink's picture

That underling bastard of mine must be at the top of that ponzi.

Dr. Engali's picture

Nothing that some hookers, blow, and a life time's subscription to their favorite porn site won't sweep under the rug.

buzzsaw99's picture

the fbi, the sec, and cftc work for the squid

Son of Captain Nemo's picture

And maybe before we start a nuclear war we will have the satisfaction of seeing the "orange skinned one" wearing the same color in her jumpsuit attire.

One can only hope!

Cognitive Dissonance's picture

Is this where we discuss closing the barn door after the horses have already bolted?

DavosSherman's picture

SEC's Fine = SEC's Porn Budget Revenue.

What a fucking joke.

insanelysane's picture

Is this like when the FBI finally "found" Whitey Bulger just when the US Marshalls were going to start looking?

Somewhere in the CFTC and SEC, "shit, if the NY AG's people go looking, they are going to find all that evidence we have been turning our backs on."

Republic_of_TX's picture

Providing better rates for heavy traders isn't the real crime.  Providing better, faster less opaque market info is.  CFTC should be looking at "superuser" status of the market makers that the exchanges provide and how said users get preferential treatment when it comes to market data.

MrBoompi's picture

The "secret deals" the large volume HFT outfits get is only a minor part of the problem.  The major issue is the front running.  Skimming billions from actual market participants is stealing, plain and simple.  And the CFTC knows this is going on already.  Any news leak about an investigation is just propaganda.  They won't do a fucking thing.

WMM II's picture

"examining whether the preferential treatment market operators offer the firms puts other investors at a disadvantage"



that'll take a lot of skill to come up with a "no".



Conax's picture

CFTC are a shameless bunch of sold out dickheads.

How they can cash their paychecks with a straight face is the only question I would have for them. 

May their nether regions be infested with a million crab lice while their hemorrhoids drag the ground.

Joebloinvestor's picture

The exchanges give:

1.Discounts for volume.

2.Information before anyone else.

3.Direct connection.


Seems like the definiton of a DC lobbyist except for the discount.

MeBizarro's picture

Another 'innovation' which is completely useless and does nothing but suck marrow out of the system.  I have yet to read a single compelling economic piece about how HFT traders enhance US capitalism or market trading in general besides gross generalizations including BS about increased liquidity, etc. 

nostromo17's picture

SO are we being set up so that "full disclosure" of "secret deals" makes HFT OK? (As the argument of the CFTC takes a non-disclosure focus rather than a focus on what is just plain unfair - early information to a few partcipants that pay for it and allowing technological advantage to be a price discovery and price creation advantage to the disadvantage the majority of other market players.)

THe question of whether HFT is unfair shows how far from reality the regulators and wall street have gone in deluding themselves and obfuscating their thinking and language into doublespeak. To believe early disclosure of information could possibly be fair so badly begs the question as to be ludicrous. Why not just ask "Can we make unfair trading advantages, grinding markets for discounts and payola for disclosure of information earlier to some market participants LOOK FAIR to everyone we are screwing?"

On one side the definite opportunity to "short" HFT companies that will dissappear with proper rulings.