December 14, 2015
https://en.wikipedia.org/wiki/High-frequency_trading#Risks_and_controversy
Various studies reported that high-frequency trading reduces volatility and does not pose a systemic risk,15555668 and lowers transaction costs for retail investors,18375556without impacting long term investors.101556 However, high-frequency trading has been the subject of intense public focus and debate since the May 6, 2010 Flash Crash.225051525354747576citation clutter At least one Nobel Prize–winning economist, Michael Spence, believes that HFT should be banned.77 A working paper found "the presence of high frequency trading has significantly mitigated the frequency and severity of end-of-day price dislocation".78
In their joint report on the 2010 Flash Crash, the SEC and the CFTC stated that "market makers and other liquidity providers widened their quote spreads, others reduced offered liquidity, and a significant number withdrew completely from the markets"69 during the flash crash.
Politicians, regulators, scholars, journalists and market participants have all raised concerns on both sides of the Atlantic.337679 and this has led to discussion of whether high-frequency market makers should be subject to various kinds of regulations.
In a September 22, 2010 speech, SEC chairperson Mary Schapiro signaled that US authorities were considering the introduction of regulations targeted at HFT. She said, "high frequency trading firms have a tremendous capacity to affect the stability and integrity of the equity markets. Currently, however, high frequency trading firms are subject to very little in the way of obligations either to protect that stability by promoting reasonable price continuity in tough times, or to refrain from exacerbating price volatility."80 She proposed regulation that would require high-frequency traders to stay active in volatile markets.81 Current SEC chair Mary Jo White pushed back against claims that high-frequency traders have an inherent benefit in the markets.82 SEC associate director Gregg Berman suggested that the current debate over HFT lacks perspective. In an April 2014 speech, Berman argued: "It's much more than just the automation of quotes and cancels, in spite of the seemingly exclusive fixation on this topic by much of the media and various outspoken market pundits. (...) I worry that it may be too narrowly focused and myopic."83
The Chicago Federal Reserve letter of October 2012, titled "How to keep markets safe in an era of high-speed trading", reports on the results of a survey of several dozen financial industry professionals including traders, brokers, and exchanges.21 It found that
risk controls were poorer in high-frequency trading, because of competitive time pressure to execute trades without the more extensive safety checks normally used in slower trades.
"some firms do not have stringent processes for the development, testing, and deployment of code used in their trading algorithms."
"out-of control algorithms were more common than anticipated prior to the study and that there were no clear patterns as to their cause."
The CFA Institute, a global association of investment professionals, advocated for reforms regarding high-frequency trading,84 including:
Promoting robust internal risk management procedures and controls over the algorithms and strategies employed by HFT firms.
Trading venues should disclose their fee structure to all market participants.
Regulators should address market manipulation and other threats to the integrity of markets, regardless of the underlying mechanism, and not try to intervene in the trading process or to restrict certain types of trading activities.
Flash tradingedit
Another area of concern relates to flash trading. Flash trading is a form of trading in which certain market participants are allowed to see incoming orders to buy or sell securities very slightly earlier than the general market participants, typically 30 milliseconds, in exchange for a fee. This feature was introduced to allow participants like market makers the opportunity to meet or improve on the national best bid and offer price to ensure incoming orders were matched at the most advantageous prices according to Regulation NMS.
According to some sources, the programs can inspect major orders as they come in and use that information to profit.85 Currently, the majority of exchanges do not offer flash trading, or have discontinued it. By March 2011, the NASDAQ, BATS, and Direct Exchange exchanges had all ceased offering its Competition for Price Improvement functionality (widely referred to as "flash technology/trading").8687
Insider tradingedit
On September 24, 2013, the Federal Reserve revealed that some traders are under investigation for possible news leak and insider trading. Right after the Federal Reserve announced its newest decision, trades were registered in the Chicago futures market within two milliseconds. However, the news was released to the public in Washington D.C. at exactly 2:00 pm calibrated by atomic clock,88 and takes seven milliseconds to reach Chicago at the speed of light.89 Contrary to claims by high-frequency trader Virtu Financial,90 anything faster is not physically possible.
Violations and finesedit
Regulation and enforcementedit
In March 2012, regulators fined Octeg LLC, the equities market-making unit of high-frequency trading firm Getco LLC, for $450,000. Octeg violated Nasdaq rules and failed to maintain proper supervision over its stock trading activities.91 The fine resulted from a request by Nasdaq OMX for regulators to investigate the activity at Octeg LLC from the day after the May 6, 2010 Flash Crash through the following December. Nasdaq determined the Getco subsidiary lacked reasonable oversight of its algo-driven high-frequency trading.92
In October 2013, regulators fined Knight Capital $12 million for the trading malfunction that led to its collapse. Knight was found to have violated the SEC's market access rule, in effect since 2010 to prevent such mistakes. Regulators stated the HFT firm ignored dozens of error messages before its computers sent millions of unintended orders to the market. Knight Capital eventually merged with Getco to form KCG Holdings. Knight lost over $460 million from its trading errors in August 2012 that caused disturbance in the U.S. stock market.93
In September 2014, HFT firm Latour Trading LLC agreed to pay a SEC penalty of $16 million. Latour is a subsidiary of New York-based high-frequency trader Tower Capital LLC. According to the SEC's order, for at least two years Latour underestimated the amount of risk it was taking on with its trading activities. By using faulty calculations, Latour managed to buy and sell stocks without holding enough capital. At times, the Tower Capital subsidiary accounted for 9% of all U.S. stock trading. The SEC noted the case is the largest penalty for a violation of the net capital rule.94
In response to increased regulation, some9596 have argued that instead of promoting government intervention, it would be more efficient to focus on a solution that mitigates information asymmetries among traders and their backers.
Order typesedit
On January 12, 2015, the SEC announced a $14 million penalty against a subsidiary of BATS Global Markets, an exchange operator that was founded by high-frequency traders. The BATS subsidiary Direct Edge failed to properly disclose order types on its two exchanges EDGA and EDGX. These exchanges offered three variations of controversial "Hide Not Slide"97 orders and failed to accurately describe their priority to other orders. The SEC found the exchanges disclosed complete and accurate information about the order types "only to some members, including certain high-frequency trading firms that provided input about how the orders would operate."98
Reported in January 2015, UBS agreed to pay $14.4 million to settle charges of not disclosing an order type that allowed high-frequency traders to jump ahead of other participants. The SEC stated that UBS failed to properly disclose to all subscribers of its dark pool "the existence of an order type that it pitched almost exclusively to market makers and high-frequency trading firms." UBS broke the law by accepting and ranking hundreds of millions of orders99 priced in increments of less than one cent, which is prohibited under Regulation NMS. The order type called PrimaryPegPlus enabled HFT firms "to place sub-penny-priced orders that jumped ahead of other orders submitted at legal, whole-penny prices."100
Quote stuffingedit
Main article: Quote stuffing
In June 2014, high-frequency trading firm Citadel LLC was fined $800,000 for violations that included quote stuffing. Nasdaq's disciplinary action stated that Citadel "failed to prevent the strategy from sending millions of orders to the exchanges with few or no executions." It was pointed out that Citadel "sent multiple, periodic bursts of order messages, at 10,000 orders per second, to the exchanges. This excessive messaging activity, which involved hundreds of thousands of orders for more than 19 million shares, occurred two to three times per day."101102
Spoofing and layeringedit
Main articles: Spoofing (finance) and Layering (finance)
In July 2013, it was reported that Panther Energy Trading LLC was ordered to pay $4.5 million to U.S. and U.K. regulators on charges that the firm's high-frequency trading activities manipulated commodity markets. Panther's computer algorithms placed and quickly canceled bids and offers in futures contracts including oil, metals, interest rates and foreign currencies, the U.S. Commodity Futures Trading Commission said.103 In October 2014, Panther's sole owner Michael Coscia was charged with six counts of commodities fraud and six counts of "spoofing". The indictment stated that Coscia devised a high-frequency trading strategy to create a false impression of the available liquidity in the market, "and to fraudulently induce other market participants to react to the deceptive market information he created".104
Market manipulationedit
Main article: Market manipulation
In October 2014, Athena Capital Research LLC was fined $1 million on price manipulation charges. The high-speed trading firm used $40 million to rig prices of thousands of stocks, including eBay Inc, according to U.S. regulators. The HFT firm Athena manipulated closing prices commonly used to track stock performance with "high-powered computers, complex algorithms and rapid-fire trades," the SEC said. The regulatory action is one of the first market manipulation cases against a firm engaged in high-frequency trading. Reporting by Bloomberg noted the HFT industry is "besieged by accusations that it cheats slower investors."105
Advanced trading platformsedit
Advanced computerized trading platforms and market gateways are becoming standard tools of most types of traders, including high-frequency traders. Broker-dealers now compete on routing order flow directly, in the fastest and most efficient manner, to the line handler where it undergoes a strict set of risk filters before hitting the execution venue(s). Ultra-low latency direct market access (ULLDMA) is a hot topic amongst brokers and technology vendors such as Goldman Sachs, Credit Suisse, andUBS.citation needed Typically, ULLDMA systems can currently handle high amounts of volume and boast round-trip order execution speeds (from hitting "transmit order" to receiving an acknowledgment) of 10 milliseconds or less.
Such performance is achieved with the use of hardware acceleration or even full-hardware processing of incoming market data, in association with high-speed communication protocols, such as 10 Gigabit Ethernet or PCI Express. More specifically, some companies provide full-hardware appliances based on FPGA technology to obtain sub-microsecond end-to-end market data processing.
Buy side traders made efforts to curb predatory HFT strategies. Brad Katsuyama, co-founder of the IEX, led a team that implemented THOR, a securities order-management system that splits large orders into smaller sub-orders that arrive at the same time to all the exchanges through the use of intentional delays. This largely prevents information leakage in the propagation of orders that high-speed traders can take advantage of.
http://www.nytimes.com/2015/03/13/business/dealbook/sec-chief-defends-agencys-handling-of-bank-punishment.html?_r=0
Just keep the corruption flowing there Mary JO ......
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One of Wall Streets top regulators on Thursday shot back at criticism that the nations biggest banks enjoy special treatment in Washington, delivering a sweeping defense of the government while also rebuking the financial industrys repeated and disturbing violations of law.
In a speech at Georgetown University, Mary Jo White, the chairwoman of the Securities and Exchange Commission, publicly addressed for the first time a growing debate over whether her agency allowed banks to avoid certain repercussions for their misdeeds.
The debate centers on criticism — from Congressional Democrats and even some of the S.E.C.s own commissioners — that the agency routinely provided banks valuable waivers from so-called bad actor bans that arose when a bank settled an S.E.C. case or pleaded guilty to a crime. The waivers, critics say, offer a free pass from bans that would disqualify banks from most private offerings of securities.
At the heart of Ms. Whites rebuttal was previously unreleased data suggesting that her agency did not simply rubber stamp Wall Streets requests for waivers. The data, she said, shows that the S.E.C. rejected 14 bad actor waiver requests and granted 13 over the last year and a half.
Some have said that the commission and its staff routinely grant waivers without rigorous analysis, she said, a veiled reference to some of her colleagues at the S.E.C. That is simply not true.
Ms. Whites speech represents her fullest rebuttal of criticism that her agency has adopted a light touch with Wall Street, a concern that traces to the aftermath of the 2008 financial crisis. The speech also provided a long-awaited moment for Ms. White, who joined the agency two years ago next month with the reputation as a tough-on-crime former federal prosecutor, to stem the rising wave of doubt about the S.E.C.s waiver policy.
The waiver issue has become an unlikely cause clbre for consumer advocates and liberal lawmakers, and one that has divided the S.E.C.s five commissioners. The commissions liberal wing has been pitted against the agencys two Republican commissioners, creating a conundrum for Ms. White, a political independent and the deciding fifth vote.
Simmering for a while, tension erupted last month over the handling ofOppenheimer Company, which settled a case that set off a bad actor ban. Despite a pattern of recidivism at Oppenheimer — with at least 30 regulatory actions over the last decade — the S.E.C. granted the company a waiver.
Given the long record of broken promises, the commission must demand more accountability from this firm and its leadership, Kara M. Stein and Luis A. Aguilar, the agencys Democratic commissioners, wrote in a joint dissent at the time.
In her speech, Ms. White detailed her own approach to the issue, striking a balance between the populist uproar over waivers and the cases in which they might be warranted.
These are important provisions that enable the commission to safeguard investors and our capital markets from those whom we do not think should be able to fully function in them because of their past misconduct, Ms. White said.
Ms. White emphasized that banks were no more likely to receive a waiver than any other public company, saying, We should and do treat large financial institutions exactly the same as any other firm or person when considering whether a waiver is appropriate — no better, and no worse.
But Ms. White also outlined the cases in which, at least in her judgment, the S.E.C. should grant the waivers. The rules governing waivers, she noted, allow for exemptions for good cause or in the public interest. Other times, she said, the rules direct the S.E.C. to grant waivers if the disqualification would be unduly or disproportionately severe.
Doing so, she said, might temper the potential over-breadth of the disqualification provisions.
Ms. White also drew a distinction between waivers, which are overseen by the agencys division of corporation finance, and the penalties that the S.E.C.s enforcement division imposes on companies that misbehave. Unlike the penalties, she said, waivers were never intended to be, and we should not use them as, an additional enforcement tool designed to address misconduct.
In defending her agencys approach to punishing Wall Street, Ms. White finds herself in an unexpected position. As the former United States attorney in Manhattan — a role in which she prosecuted banks and financial frauds — she sailed through Senate confirmation with little concern.
Now, in articulating her agencys enforcement agenda, she is leaning on her prosecutorial past.
We have seen repeated and disturbing violations of law by major financial institutions, both before and after the financial crisis, she said. And the debate over waivers, she added, should never obscure or distract from our overall commitment to rigorous enforcement.
Ms. White also addressed concerns that Wall Street, by nature of its size and importance to the economy, avoids meaningful punishment.
One series of questions that has been raised in the dialogue is whether financial institutions that are potentially subject to disqualifications are too big to indict or otherwise charge, too big to jail, or even too big to bar. My answer to all of these and similar questions is a resounding, No.