On October 20, 2015, SEC Chair Mary Jo White gave the keynote address at the “Evolving Structure of the U.S. Treasury Market” conference organized by the U.S. Department of Treasury and the Federal Reserve Bank of New York. The conference and speech follow this summer’s Joint Staff Report analyzing the significant volatility that the U.S. Treasury market experienced on October 15, 2014. The Joint Staff Report was a cooperative effort of the Department of Treasury, the Federal Reserve, the SEC and CFTC, and was the subject of a previous post on this blog (Regulators Fail To Identify Cause Of Abnormal US Treasury Trading on October 15, 2014).
CFTC Accuses Firm Manually Entering Orders Of Spoofing Scheme That Fooled Algorithmic Traders
Potentially abusive trading algorithms, such as algorithms that purportedly engage in “spoofing” or “layering” are the subject of considerable regulatory interest. However, in an interesting complaint filed on October 19, 2015, the CFTC alleged that a firm manually entering futures orders engaged in illegal spoofing that appears to have lured algorithmic traders into the market.
Big Loss For Plaintiffs In High Frequency Trading Cases
Last week, SDNY Judge Jesse Furman issued a 51 page decision in In Re: Barclays Liquidity Cross and High Frequency Trading Litigation dismissing all of the cases consolidated under the MDL. In these cases, investor plaintiffs asserted federal securities law claims under Section 10(b) and 6(b) of the Exchange Act against seven stock exchanges, Barclays PLC, and Barclays Capital Inc., as well as California state law claims against Barclays, based on their contention that defendants’ practices permitted high frequency traders (“HFTs”) to obtain unfair trading advantages over other investors. Judge Furman dismissed all the claims because the allegations were insufficient to state a claim as a matter of law.
SEC Brings First Major Cyber Insider Trading Case Against International Hacking Ring
In an action that emphasizes the agency’s commitment to cybersecurity, the SEC recently charged 32 defendants with violations of the federal antifraud laws and corresponding SEC rules, stemming from an alleged $100 million conspiracy to steal and trade on material non-public information contained in corporate earnings announcements that were obtained by hacking into the computer networks of three newswire services.
Cyber Security Regulations Ahead Says New York State’s Dept. of Financial Services
Based on a report released last week about cyber security vulnerabilities faced by financial institutions, New York State Department of Financial Services (“NYDFS”) Superintendent Benjamin Lawsky signaled that the agency will soon move forward with cyber security regulations. The report concluded that banks’ third-party vendors have significant potential cyber security vulnerabilities. Superintendent Lawsky said that the regulations will strengthen cyber security standards for banks’ third-party vendors, including potential measures related to cyber security representations and warranties that banks receive from their vendors.
SEC Sanctions Two Exchanges for Failing to Accurately Describe Order Types and Making Preferential Disclosure to High Frequency Traders
On January 12, 2015, the Securities and Exchange Commission announced that it had obtained a $14 million settlement against two exchanges formerly owned by Direct Edge Holdings, EDGA and EDGX (the “Respondent Exchanges”) for their failure to file Exchange Rules that accurately described the order types they offered, and for providing preferential disclosure to certain high frequency traders. This recovery constitutes the largest penalty ever levied by the SEC against a national securities exchange and appears to be the first action focusing primarily on exchange order type issues.
According to the SEC’s Order, the official Rules filed by both Exchanges only described a single price sliding order type, while each Exchange actually offered three variations to their members: Hide Not Slide, Price Adjust, and Single Re-Price. The SEC claims that the Rules failed to describe each order’s functionality and their priorities relative to each other and other order types. Moreover, although this information was not available to all members, the Exchanges provided it to a select few customers, including several high frequency trading firms. The SEC also claims that that two of these order types were developed in response to requests from high frequency trading customers and that both Exchanges would rotate which order type was used by default without filing the necessary Rule Amendment or providing notice to anyone except these “preferred” members.
Regulators Continue To Address High-Frequency Trading
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.