Wall St. watchdog probing 170 instances of possible algorithmic abuses
Wall Street's self-regulator is cracking down on abusive trades made on the basis of mathematical algorithms and currently has some 170 ongoing investigations into the subject, its chief said on Monday.
The Financial Industry Regulatory Authority (FINRA) is looking at instances in which brokerage firms may have used algorithms to engage in abusive trades, or failed to supervise the use of algorithms by their advisers, Rick Ketchum, FINRA chairman and chief executive, told reporters at the regulator's annual conference in Washington.
Last week FINRA brought market manipulation case jointly with financial exchanges run by CBOE Holdings Inc, NASDAQ OMX Group Inc and IntercontinentalExchange Group Inc involving what they alleged was an algorithmic-trading scheme where waves of equity trades were used to artificially affect options pricing.
New York-based HAP Trading LLC and its chief executive, Harsh Padia, were ordered to give up $1.25 million in profits and pay $250,000 in penalties for manipulation and for failing to properly supervise an employee, according to a statement from the exchanges.
FINRA's recent investigations are a response to the U.S. Securities and Exchange Commission's 2011 so-called "market access rule" requiring brokerages with direct market access to have risk management controls and supervisory procedures in place, Ketchum said.
Ketchum's comments come as critics such as influential author Michael Lewis, in his book "Flash Boys: A Wall Street Revolt", accuse high-frequency traders of using their faster computers to manipulate stock prices in their favor.
FINRA is concerned about algorithms designed to trigger illegal, manipulative market behaviors such as "spoofing," when orders are rapidly placed and canceled to create the illusion of market demand. Unsuspecting traders are then tricked into buying or selling at artificial prices, only to later find that the orders were canceled.
A large percentage of the improper market activity represents orders firms handle as agents for their clients, not necessarily market activities by the firms themselves, Ketchum said.
FINRA's investigations have already led to some recent enforcement actions, such as the CBOE complaint filed last week, Ketchum said.
FINRA expects to announce more enforcement cases during the coming year, Ketchum said.
(This corrects headline to say 170 instances, not 170 firms)
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Does anyone believes HFT's are in it for the Nobel Peace Prize :-) its a cold hard and unfair business and for anyone that's trades ES for one day knows this is commonplace, so this doesn't surprise me at all. They'll try to get away with whatever they can, until they're stopped and heavily fined. Will that happen? ..probably not in most cases. And for me that points to the ineffectiveness of the regulatory authorities.
Although I don't personally see any problem with the fake orders.. it maybe just because I do a lot bluffing when I play poker and I just see it part of the game.
Anyway I do see HFT trading based on special connection feeds as a way to create a house advantage for the HFT firms and I am totally amazed that hasn't been fixed yet. There should be a amendment in the Dod-Frank Act to instill a .5 second delay in all data that leaves brokerages to centralized data servers and the only advantage anyone can have is co-location to those servers. If your a order flow trader it would probably help you see a more accurate order flow and it should make for a more fair trading environment. Then they can start to work on all the massive insider trading that's done inside our government by its employees and elected officials with complete impunity because the SEC that is run by the government would have to police its own federal poeple and that would never happen. The SEC is pretty much a puppet and a lame one at that. remember Madoff is all I have to say..
HFT speed feeds have to go !!!! ATICA ...ATICA.. ATICA