Goodbye High Frequency Trading - Regulators Seek Secret HFT Codes

Tyler Durden's picture

The crusade against High Frequency Trading which Zero Hedge started well over two years ago, is now coming to an end. Reuters reports that U.S. securities regulators have "taken the unprecedented step of asking high-frequency trading firms to hand over the details of their trading strategies, and in some cases, their secret computer codes." As everyone knows, the only thing of value within the sub-penny scalping HFT universe are the odd nuances in computer code. Which is why its supreme and undisputed secrecy is sacrosanct. As soon as anyone, especially a regulator, has a whiff of understanding how any given algorithm works, it becomes the equivalent of collapsing the wave function: observing the HFT theft-scalping duality in action eliminates the Schrodinger equation associated with any simplistic algo and collapses its "wave function" to a worthless series of ones and zeros. Said otherwise, this is the end for HFT.

More from Reuters:

The requests for proprietary code and algorithm parameters by the Financial Industry Regulatory Authority (FINRA), a Wall Street brokerage regulator, are part of investigations into suspicious market activity, said Tom Gira, executive vice president of FINRA's market regulation unit.


``It's not a fishing expedition or educational exercise. It's because there's something that's troubling us in the marketplace,'' he said in an interview.


The Securities and Exchange Commission, meanwhile, has also begun making requests for proprietary algorithmic trading data as part of its authority to examine financial firms for compliance with U.S. regulations, according to agency officials and outside lawyers.


The requests by SEC examiners are not necessarily related to any suspicions of specific wrong-doing, although the decision to ask for it can be triggered by a tip, complaint or referral.

It's all in the code:

Trading code is a high-stakes secret for high-frequency firms that battle each other to earn razor-thin profits on tiny price imbalances in the market. Such firms can make thousands of trades per second and provide much liquidity to the market.


High-frequency trading is estimated to be involved in more than half of all U.S. stock trading. Regulators have said the algos behind such trading were a factor in the flash crash, but that they did not cause it.


Carlo di Florio, who heads the SEC's Office of Compliance, Inspections and Examinations, said the agency started asking firms for proprietary algorithmic trading data over a year ago, and has since more broadly incorporated such requests into its risk-based exams.


Most of the algo-related requests, he said, have been made to hedge funds that use quantitative trading strategies.


Although some lawyers and industry sources have said the SEC has asked for the actual computer code itself, di Florio said such a request is "very rare." Instead, most of the time the SEC has been asking for research papers containing sensitive information about trade reasoning and proprietary formulas.

Luckily once the HFT scourge is over, it will finally return the market to a normal state of liquidity and volume, not the current churn of rebate paying stocks (all 10 of them in a universe of 5000). Yes, some liquidity may be lost. But what remains will set the basis for a return to true efficiency.

After this momentuous victory against the "robots", the only event that could possibly top it, would be extrication (by force or otherwise) of the Chairsatan and his globalistic central planning cohort from capital markets.

At that point the stage for restoration of normalcy will finally be set.

In the meantime we will take it: one day at a time... until the war is finally won.

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speconomist's picture

No more Frontrunning Bitchez!

Doña K's picture

No frontrunning. But.....

It will be easier for the PPT and Bernanke to manipulate the markets.  

spiral_eyes's picture

I really doubt this will be the end for HFT. This technical stuff isn't really my field, but I know that cutting off hands never stopped shoplifters. This will drive the market manipulators underground. But when the manipulators are the Fed's own tentacles — remember, Bernanke is not just a Keynesian but (far more dangerously) an "innovative" post-modern Keynesian who plays Keynesian games in unexpected places — just how underground is underground is the real question.

Fish Gone Bad's picture

This is how the Obama is planning to win the election.  Throw some bankers in jail after the perp walk, and let the American people know that he has their backs.  After all the screaming, crying, and hand wringing, things will resume their usual course.

Mactheknife's picture

>It will be easier for the PPT and Bernanke to manipulate the markets.  

So...since they can't raise taxes they'll just have Timmah steal it from the markets...err, frontrun the, provide liquidity. That's the ticket.

Cliff Claven Cheers's picture

For as smart as you Tylers are, I can't believe that this is the end of profitable trading.  Since when, name an example has a Federal Regulator ever stopped a bank from doing shit.  The regulators do what they are told, not the other way around.  We all know regulators are just doing favors until they get that cush bank consulting job.

Zero Hedge analysis: Fail.

rocker's picture

Yipes, are you a holder of special sauce on a turd trade.  Yes they will figure out to how to manipulate trades.

Even if they need to call each other and execute all at once. 

But maybe, just maybe, some of the shit the HFT elitist do will be curtailed.  One tick at a time.

Maybe they should add a $1.00 tax for ever trade made. Even if they are pulled or cancelled.


Founders Keeper's picture

[Maybe they should add a $1.00 tax for ever trade made. Even if they are pulled or cancelled.]---rocker

Great.  Another tax that will be passed on to the likes of us.

Please stop thinking like that.


Arthor Bearing's picture

The thinking we should all try and stop is categorical, inflexible thinking. You get less of what you tax, which is a big reason taxes can do good. It disincentivizes what might otherwise be a profitable but damaging activity. A tax on all trades would incentivize buy-and-hold trading and disincentivize day-trading, which might contribute to stability (for the same reason the HFTs' "liquidity" can create instability). It's certailny worth considering

Founders Keeper's picture

Hi Arthor Bearing.  Thank you for your Reply.

I disagree with your premise another tax could be a good thing.  Another tax is not a good thing---categorically speaking.

Taxes, like govt, is a necessary evil.  Should be limited.  Like turning to govt for solutions to problems, taxing should not be our primary go-to solution. 

The incentive one needs is unencumbered freedom, and the confidence that rule of law will prevent the govt and 3rd party risk from stabbing you in the back.

I'm absolutely inflexible about principles.  Unapologetic patriot of our founding principles. 


He_Who Carried The Sun's picture

Bah, its just windowdressing by the SEC. They will let them run down the alley again as soon as nobody's lookin'.


JoeStocks's picture

Why? Because they conflict with the secretive codes that Federal Reserve connected hedge funds use to boost the market at opportune times.

LongBalls's picture

JoeStocks is spot on. The Fed and friends hate competition. If they want to juice the market they are going to juice the market. These pole smokers have no problem eating their own.


MachoMan's picture

Exactly, when the capitalist's paradox tells us government intervention is good for nothing but implementing barriers to entry, then why would we expect anything different from this exercise?

The little shops that seek to revolutionize/nail more established players will have no chance when their code is provided to the established players...  An added bonus is that knowing how all the algos interact should make it easier to get more mileage out of PPT shocks.

I realize I'm arguing from induction, but still...

Cliff Claven Cheers's picture

I prefer the term Squirt Stick Suckers versus Pole Smokers.

Pegasus Muse's picture

If HFT robo-trading is impeded or shut down it will be due, in no small measure, to the efforts of ZH and those guys at NANEX.  Good on ya, boyz!

NoClueSneaker's picture

ZHedgers & Nanex sunk HFT battleship before the EU-media even took a notice of the scam.

Congrats and thx ...

( Sink the rest of the Bernank's fleet ).


crazyjsmith's picture

But why?? Why would they do this?  This move would just make WAY too much sense.  They haven't done ANYTHING along those lines in a very very long time. 

What's next? An audit of the FED?  Possibly a criminal conviction or two?  Cats and Dogs living together????

Darth Lord Blankfein is even getting all lawyered up for something. 

The mercury level is surely dropping in hell right about now if this is really happening. 


Milestones's picture

My son and I had a conversation along these lines tonite. His thesis: Bammy Mammy realizes he is not going to get the banking $$$ like he needs so he is now seeing his options as the people, whom he despises, (he remembers being poor himself one time) GS has been getting beat up some in the last couple of weeks by Bammy--no accident--its a message. Line up and play ball, and the ball is now in my court. What you stole can get unstoled very quickly.      Milestones

Doña K's picture

You're talking SOP Chicago politics.

"See boys, I need to have a billion $ by the 2012 start of elections campaining." 

"Place your bets."

V10's picture

Won't someone please think of the poor unemployed robots?

StychoKiller's picture

"Please sir, can you spare a cup of booze?" -- Tinny Tim, "Futurama" :>D

DormRoom's picture

open source the HFT code, so everyone can protect against the flash crash virus.

Corn1945's picture

You are losing it Tyler. Do you really think they are going to crack down on the market levitation machine?

Come on man!

PaperBugsBurn's picture

there are changes afoot


why else would cnbs have a series titled gold rush and have serious discussion of the gold standard?

PaperBugsBurn's picture

I think we are about to learn what Jennins meant by nailing us on a cross of gold.

SWRichmond's picture

If you can't beat em, join em (and then beat em).

Tyler Durden's picture

Funny: when we said the same thing of prop trading in January 2010, the comment board was full of skeptics: Beginning Of The End For Wall Street's Various Prop Trading Desks

...Now you cant find a Wall Street prop desk to save your life.

Josephus's picture

Nice! Love to hear this! 

So instead of all the (now unemployed) MIT grads pinching pennies from the market, they will be welcomed by the NSA write stalking algos!!!

spiral_eyes's picture

Prop desks gone underground, Tyler

I want to be optimistic that the destructo-juggernauts can be regulated out of business/fashion. I really do. But I think Ron Paul is right — not only is the free market the best regulator, it is the only regulator that can be effective in the long term. While the monopolists are still in business (and with big gov't the vampires will always find a way to leech) they can always at some later date climb up out of the muck and rig the system again.

You want proof?

Gramm-Leach-Bliley, bitchez. 

Payable on Death's picture

Certainly agree in principal. Still, Glass-Steagall was a good reg. A worthy role for government--of the very few--is antitrust. The oligarchy becomes evident when you realize that most Republicans are pro-business, not pro-market.

Stack Trace's picture

The crux of all our problems. Well said.

Mactheknife's picture

You can thank Phill Grahm, republican from Texas for the repeal of Glass-Steagall. Exactly where this mess started.

Coldfire's picture

A variant of the John Wayne Gacy childcare fallacy. The holder of the monopoly on force is just the fellow to police business monopolies unsustainable without the connivance of the holder of the monopoly on force. Cf. Schumpeter. Von Mises. Hayek.

disabledvet's picture

Who? And how would the Fed's know if these are the actual programming? By comparing it with their own at the Fed? I understand the need for an "algo dump"--but what the government would do with this information is anyone's guess. My guess would be it's designed to get to the bottom of the recurrent "flash crash" issue but taking the HFT's away could cause more harm than good.

StychoKiller's picture

Not only that, but source code by itself, is hard to figure out if the code is NOT commented well, and/or contains cryptic variable names and/or spaghetti constructs.  Without test suites, what're ya gonna do?  Watch the code actually execute in the exchanges?  What's to stop some Govt PC-jockey from claiming the code as his/her own and using it at home?

One giant can of worms here, is all I can say!

crazyjsmith's picture

Thank You again Tyler!   This site is the much more illuminating than Wikileaks could ever want to be. 

If I were a digital chic, I would be all over your hot ass right now... just sayin...if I were a digital chic...

Melin's picture

Surely you can imagine our surprise at your exuberance that the regulators were finally "on the job". 

By the way, it's impossible to donate to your site thru your Paypal link and I'm not sending you gold so. . .

Rick64's picture

Don't you think the HFT firms will argue that this is proprietary information? Long drawn out arbitration or legal battle?

indygo55's picture

Make them fight for it. Make them come out in the open and fight for their proprietary code. When they are in the open we then will know them. They cannot exist in the open and the regulators cannot relent, not in the open. Make them fight.

Milestones's picture

There is a proprietary code on DUI breath tests which you are not able to challenge in courts. How about them apples??     Milestones

StychoKiller's picture

There's proprietary code in Diebold™ voting machines, how about them oranges?

Rick64's picture

Sounds good until you see who is in charge of arbitration for FINRA.  President, FINRA Dispute Resolution and Chief Hearing Officer Linda d. Feinberg, who use to work for the law firm Covington&Burling whose clients were

Major companies that have been represented by attorneys of the firm include: Bank of America, Bunge, Deere & Company, Eastman Kodak Company, Eli Lilly, General Electric Company, Giorgio Armani, IBM Corporation, Harley-Davidson,, Microsoft Corporation, Morgan Stanley, NASCAR, National Basketball Association, National Football League, Procter & Gamble, and Verizon.[5]

Controversial clients of the firm include: OCP,[6] Creekstone Farms Quality Beef,[6] Southern Peru Copper Corporation, Philip Morris, Halliburton, and Xe Services.[7]

Cole Younger's picture

The only problem I see is that they have been asking for the codes for a year now according to the article. HFT hasn't stopped yet..Are they attempting to figure out the legality of HFT? It appears they know who is doing it.

Banjo's picture

I guess the point is, prop desk or HFT the clipping shears are out for the "average" investor somewhere.

Look we ended HFT average Joe comes back to market only to get bent over again by "some other" "financial innovation"

Good luck get ready to dive back into the markets with your cash once HFT is gone!

Stoploss's picture

Nice to have the last laugh isn't it.. Good job, don't let up ..

Goldman Hufs's picture

I hate to piss on everyone's parade but the only reason this is happening is because the big boys want it to happen.  With the average person no longer putting anymore money into the rigged casino and old school prop type firms closing down left and right there just isn't enough "free" money to be stolen by all of these HFTs.  Since Goldman and the like realize that that it's no longer them and the private HFT shops fleecing the general public but instead becoming ever more them VS the private HFT firms they simply want to shut it down before they start losing.  The private HFT firms can pay much more and don't have the public eye mulling over there books to criticize the outlandish salaries that these computer geeks are paid.  Because of this difference the top talent will migrate out of the big banks' control which would put them at a disadvantage, and being the true competitors that they are, will shut the entire practice down before they ever had to actually go toe to toe with legitimate competition.  When it does come to end they can go back to their true proprietary technique which most of us here know as insider trading. 

I applaud Zero Hedge for shedding light on this debauchery but the cynic in me does not believe that this has caused the regulators to find their religion.  However, you allow the rest of us to dig through the BS and protect our wealth from these predators.  Please keep up the good work.  This is the only place where a rational person can begin to understand why these markets are so irrational.  Thanks Tylers.

Atomizer's picture



Did you see this today? I'm neutral because I follow a lot mentioned.


Endgame: When Debt is Fraud, Debt Forgiveness is the Last and Only Remedy


The daily twists & turns are becoming harder to manage.  bwahahahahaha.