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,

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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.

 

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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.

 

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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.

 

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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.

 

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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."

 

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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.