It has been almost 2 years since FINRA started to get 'serious' about thinking about looking into an investigation of (get our point) high-frequency trading and dark pools but it seems [9], as the WSJ reports [10], this time they are more specific. In Sept 2011 FINRA noted "there's something that's troubling us in the marketplace," and it seems now that FINRA has spent the time since understanding the jargon they have some questions, "who is responsible for the automatic shut off or kill switch," asking firms how they avoid "quote bursts and stuffing" that create confusion for other investors and potentially distort the market, and approving a plan to force dark pools (15% of all stock trading) to disclose and detail trading activity on their platforms. Of course, we've seen this kind of bluster before and they did nothing then but hope springs eternal.
Via WSJ [10],
Regulators are ratcheting up their focus on the complex computer systems deployed by high-frequency trading firms, with an eye on whether the systems have adequate safeguards against chaotic trading that can destabilize markets and harm investor confidence.
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The Financial Industry Regulatory Authority is conducting a probe of high-speed firms' trading algorithms - the computer formulas that juggle the firms' rapid-fire trades - and the controls surrounding their trading technology, according to an examination letter sent to about 10 firms this week and reviewed by The Wall Street Journal.
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The widening look at high-speed algorithms was sparked by Finra's recent investigations of high-speed trading mishaps,
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Finra is asking questions about how firms handle malfunctions, including whether they use so-called kill switches that automatically stop trading as well as "who is responsible for the automatic shut off or kill switch." It is also asking for instances of algorithm malfunctions "which had a material impact to the Firm or any instances in which the algorithm's malfunction caused a market disruption."
Another focus is on malfunctioning algorithms, known as "algos gone wild," that can jam exchanges with multiple buy and sell orders. This so-called "quote stuffing" can create confusion for other investors and potentially distort the market. Finra asks about what type of risk controls are built into algorithms designed to prevent "quote stuffing and quote bursts."
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Finra is also increasing its scrutiny of "dark pools," private trading venues, frequently operated by sophisticated computer systems that don't disclose investors' buy and sell orders. Last week, the regulator approved a plan to require dark pools to disclose and detail trading activity on their platforms, a move that would give it the clearest view yet into the private markets that account for about 15% of all stock trading, triple the total five years ago
However, in light of ever-decreasing volumes of real traders, ever-increasing dependence of Fed liquidity and asset price divergence from any fundamental reality, perhaps it is the unintended consequence of a regulator getting serious that removes one of the only legs left in the bull market's stool - the low-volume momentum ignition-driven algo-based melt-up.