When we tapered our coverage of HFT manipulation and stock market abuse some time ago, we thought that the message had been heard loud and clear: high frequency trading is a sophisticated market manipulating parasite, whose only real function is to abuse market structure and integrity, by making conventional market manipulation practices more difficult to spot and identify. It turns out some, i.e., Newedge, thought they could still get away with traditional manipulative practices such as spoofing, layering, momentum ignition, wash trading, bypassing, and others, if only they were wrapped in an HFT blanket. It did so for four years from 2008 until 2011. As it turns out it was wrong, and in a stunning example of actually doing its job, FINRA fined Newedge, which is one of the largest futures brokers in the world and ranks third in terms of U.S. customer assets on deposit, a record $9.5 million.
And while the mechanisms by which Newedge was engaging in market manipulation and outright fraud are largely irrelevant (one can always be found that works and escapes supervision for some period of time), what is more troubling is that seemingly "respected" brokerages continue to abuse markets and rule-abiding participants for the sole benefit of their clients, and their own bottom lines and bonuses of course, despite signing such ironclad fraud prevention mechanisms as self-policing, ethics and compliance manuals. Shocking.
Oh, and yet another reason - one which we have been pointing out for years - as to why the retail investor has given up on the manipulated venue where hedge funds and prop desks pass to each other the hot potatoes money printed up by the Fed.
From the WSJ [14]:
Brokerages are required to monitor clients' trading activity in order to keep the clients from breaching risk limits, and to curb manipulative activity, among other things. Newedge failed to do so for years despite repeated warnings, according to Finra. The brokerage allowed potentially manipulative trading such as "spoofing," in which firms place orders designed to trick other firms into buying or selling stocks, and "marking the close," in which firms push around stock prices at the close of trading in order to benefit from the final price, Finra said.
...
The sanctions come as regulators step up scrutiny of computer-driven trading amid worries that it is enabling market manipulation that could pose risks to the financial system and damage investor confidence. Regulators have fined several trading firms for manipulative activities over the past year, and expect to bring more such cases in the near future, according to people familiar with the matter.
Newedge allowed the questionable behavior—some of which was executed by day-trading firms—to persist despite numerous red flags, including concerns raised by employees, an independent consultant, exchanges and regulators, the filing and documents show. Regulators said Newedge's failure to track client orders over the four-year period "caused considerable systemic risk to the marketplace," according to a settlement document reviewed by the Journal.
That's ok though: Ben Bernanke is there to make sure all risk is gone.
Naturally, this being a story about HFT, there is much humor:
The emergence of manipulative trading activity—made easier by improved technology and the proliferation of electronic trading venues—has prompted regulators, traders and investors to try to build better methods to track and defend against stock-market gamers, traders say. Finra last August implemented a sophisticated market-surveillance system that already has sparked nearly 300 investigations, Mr. Gira said. The SEC is using a new market-monitoring system called Midas to track trading across stock exchanges. "Professional traders and [brokers] have developed systems and functionality to avoid being taken advantage of through bad behaviors, whether it's spoofing or other forms," said Chris Concannon, partner at Virtu Financial LLC, a high-frequency trading firm.
So the SEC is using an HFT firm to catch other HFT firms "at it." The same HFT firm that the SEC used a month ago to find that HFT does not cause flash crashes [15]. Absolute, mindboggling idiocy.
Below is one example of what NewEdge did - spoofing, a practice we have long described on Zero Hedge.
[16]
What else:
Finra said clients also engaged in multiple "wash trades," in which a firm acts as buyer and seller in the same trade to distort market activity. The practice can create the illusion of heavy trading volume that lures firms that are tracking for such activity. Between October 2008 and September 2009, three Newedge customers executed wash trades involving more than 70,000 shares of stock on an NYSE exchange, according to Newedge's settlement offer with NYSE, which was reviewed by the Journal.
Newedge also allowed some customers to evade rules around short-selling, in which traders borrow shares and sell them with the intent to buy the stock back at a lower price, profiting from the decline, according to the documents reviewed by the Journal.
For instance, Newedge allowed some clients to operate through "by-pass" accounts, which enabled skirting of rules requiring firms to locate stock—or provide assurances that they could borrow the stock—before entering a short sale. Newedge allowed the firms to short the stock without confirming that they had actually located it, "essentially relying on an 'honor system,'" according to Finra's letter reviewed by the Journal.
Newedge, which began providing direct access to U.S. stock exchanges in January 2008, received repeated warnings that its systems weren't capturing client orders, and that it was uninformed about the risk controls of clients, according to the NYSE settlement.
From the service's inception, Newedge "knew that it was unaware of what controls its clients had implemented," the settlement says.
In May 2008, a high-ranking Newedge employee sent an email to another employee expressing concerns "about the proliferation of equity trading systems without any sort of systemic evaluation of risk control functions," according to the NYSE settlement.
Another red flag, the settlement says, was "numerous regulatory inquiries [Newedge] received regarding the activity of one particular Newedge client." The client wasn't identified.
As long as that client wasn't the NY Fed's Kevin Henry all is well. Which of course he isn't. After all the NY Fed only uses Citadel.
The list of abuses goes on and on and on, because nothing has ever actually been fixed, and will continue to remain unfixed until the next, and courtesy of the central banks' all in gambit on reflation, final crash. Until then, retail will continue to disappear until finally just the primary dealers and the central banks are left buying and selling meaningless pieces of paper from each other.