Regulators across markets continue to show interest in high frequency trading and algorithmic trading generally. Recent developments in this area include:

  • On October, 16, 2014, the SEC imposed a $1 million sanction on a high frequency trading firm, Athena Capital Research, which allegedly placed large numbers of rapid-fire orders in the final two seconds of trading to manipulate the closing prices of thousands of NASDAQ-listed stocks. According to the settlement documents, the trading algorithm, code-named “Gravy,” purportedly allowed Athena to overwhelm the market’s available liquidity at the close, and artificially move the market in Athena’s favor.
  • A high-frequency commodities trader was indicted in the Northern District of Illinois on October 1, 2014, and charged with using high-speed computerized trading algorithms to manipulate the market in various commodities. This appears to be the first criminal prosecution involving electronic “spoofing,” i.e. the practice of placing bids or offers with the intent to cancel the bids or offers before execution. In US v. Cosica, the government alleges that the defendant implemented a high frequency trading strategy in which he entered large-volume orders that he intended to immediately cancel before they could be filled by other traders. 14-cr-0051 (N.D. Ill. filed Oct. 1, 2014). The government further alleges that the defendant devised this strategy to create a false impression regarding the number of contracts available in the market and to fraudulently induce other market participants to react to the deceptive market information.
  • The CFTC obtained a Consent Order imposing a $1.56 million civil monetary penalty and trading and registration restrictions on a high-frequency trader accused of attempting to manipulate the market for wheat futures. CFTC v. Moncada, 12-cv-8791 (S.D.N.Y. Oct. 1, 2014). The Consent Order states that the defendant electronically entered and then immediately cancelled large-lot orders for CBOT wheat futures that he did not intend to fill in order to create a misleading impression of rising liquidity in the market. The Consent Order also states that defendant would seek to take advantage of the price movements resulting from this allegedly manipulative scheme by placing smaller orders, which he hoped to fill at beneficial prices, on the opposite side of the market.
  • On September 19, 2014, FINRA announced that its Board of Governors had approved a number of new rule initiatives aimed primarily at algorithmic trading and market transparency related issues. In particular, FINRA stated that it will solicit comments on a potential registration requirement for all associated persons of member firms that (1) are primarily responsible for the design, development, or significant modification of an algorithmic strategy, or (2) are responsible for supervising such.
  • FINRA also announced on September 19 that it intends to provide member firms with guidance on their supervisory obligations for the development and deployment of algorithmic trading strategies. The guidance is intended to clarify member firms’ duties when utilizing algorithmic strategies and to offer suggested controls and practices to help prevent adverse market impacts.
  • Briefing on the motion to dismiss has now been completed in the New York Attorney General’s lawsuit against Barclays. People of the State of New York v. Barclays Capital, Index No. 451391/2014 (N.Y. Sup. Ct., N.Y. Cty. Oct. 7, 2014). In that case, the Attorney General alleges violations of New York law related to Barclays’ Alternative Trading System (ATS) and the use of the Barclays ATS by high frequency traders.

The actions described above reflect on-going regulatory interest in at least three areas involving high frequency trading. First, regulators appear to be focused on the use of high-frequency trading to manipulate the market though fictitious trading or similar activity. Although high frequency trading seems to be the headline, the real issue appears to be whether the trading activity at issue was fictitious or manipulative.

Second, regulators appear to be focused on the level of supervision and controls applied to the design, development and modification of electronic trading algorithms. Regulators may seek to strengthen the system of supervision and controls so as to provide better regulatory assurance that electronic trading activity will be consistent with the applicable laws and rules governing securities and commodities trading.

Third, it appears that certain regulators continue to devote attention to whether high frequency trading provides some market participants with unfair information advantages over others. It should be emphasized, however, that there has been no determination that non-manipulative high frequency trading violates existing laws or rules.

For the foreseeable future, the financial community can continue to expect additional regulatory interest in high-frequency and other algorithmic trading.

 

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Photo of Boris Zeldin Boris Zeldin

Boris Zeldin is an associate in the Litigation Department. His practice focuses on white collar criminal defense and corporate investigations, as well as complex civil litigation in the financial services area.

Boris represents clients in a broad range of complex civil and criminal…

Boris Zeldin is an associate in the Litigation Department. His practice focuses on white collar criminal defense and corporate investigations, as well as complex civil litigation in the financial services area.

Boris represents clients in a broad range of complex civil and criminal litigation matters, as well as numerous regulatory investigations and enforcement proceedings relating to securities litigation, civil RICO claims, corporate compliance issues, business torts, fraud and general commercial disputes. Boris has also assisted clients with internal investigations and due diligence undertaken in cooperation with regulators.

Photo of Stephen Ratner Stephen Ratner

Stephen L. Ratner has represented banks and other financial services institutions in complex litigations, investigations and enforcement proceedings, arbitrations and mediations, compliance issues, and regulatory controversies involving securities, commodities, and derivative products.

Steve has defended clients in class actions and other actions including…

Stephen L. Ratner has represented banks and other financial services institutions in complex litigations, investigations and enforcement proceedings, arbitrations and mediations, compliance issues, and regulatory controversies involving securities, commodities, and derivative products.

Steve has defended clients in class actions and other actions including high frequency and algorithmic trading, short selling practices, IPO allocations, and data security and privacy issues. He has also handled internal investigations and investigations and enforcement proceedings by the SEC, CFTC, Department of Justice, FINRA and other regulators regarding issues such as high frequency and algorithmic trading, market access, securities lending, trade reporting, short selling, electronic communications, and supervision. Steve also represented banks and other financial institutions in fraudulent transfer litigation and other litigation based upon failed LBOs and alleged Ponzi schemes.

Steve served as a member of Proskauer’s Executive Committee, an adjunct professor of law at Benjamin N. Cardozo School of Law, and a mediator appointed by the U.S. District Court for the Southern District of New York. Steve co-authored the “Broker-Dealer Litigation and Arbitration” chapter in the Commercial Litigation in New York State Courts treatise, and was a frequent speaker on matters related to the financial services industry.