Throw away your copy of Flash Boys and cast aside any notion that high frequency trading is inherently “good” or “bad”–it’s simply an undeniable feature of computerized trading. Or at least that’s what Bill Harts, President of the Modern Markets Initiative, argued at a program on High Frequency Trading sponsored by the New York State Bar Association yesterday. This came after two hours of discussion on recent developments in enforcement actions and regulation that the SEC, FINRA, and CFTC are undertaking in the area. Everyone, it seemed, agreed that market participants want a fair and efficient national market system. The areas for disagreement and debate centered on how to get there, who or what is to blame when the market falls short, and how to regulate it in an increasingly dynamic, technology-driven environment.
Harts suggested that the U.S. has too many exchanges already, although he lauded how they have generally led to lower transaction costs and efficiency. And he conceded that some traders engage in “shenanigans.” But when Rob Cohen, the SEC’s co-deputy chief in the Market Abuse Unit, talked about enforcement actions against spoofing (intentionally placing a large order that you do not intend to trade in order to trick others into thinking the market is going that way and to trade accordingly) and layering (placing several orders a few ticks apart to convey a buy or sell interest), the debate ensued. How do you know when an order is actually fake? How can you prove intent to defraud? What if a trader simply made a mistake?
Meanwhile, regulators try to stay one step ahead. Dave Shillman, associate director in the SEC’s Division of Trading & Marketing, outlined efforts to address market concerns through a consolidated audit trail, large trader reporting, and market information data analytics system (MIDAS), and well as proposed efforts on anti-disruptive trading rules. Jeff Mahoney, General Counsel for the Council of Institutional Investors whose members include pension funds, benefit funds, and asset managers—all with combined assets in the tens of trillions of dollars, noted that the overwhelming concerns among his constituents are simple: transparency, disclosure, and fairness. And why not charge traders for cancelling a trade?
What we can expect on the immediate horizon is a focus on what Shillman characterized as the most aggressive short-term strategies when the market is fragile. The question that still looms is what to do about technological advantages that benefit some market participants over others. Either way, we’re sure to see more on the role of algorithms in this space in coming months and years.
S.P. Slaughter
Follow me on Twitter: @SP_Slaughter
Harts suggested that the U.S. has too many exchanges already, although he lauded how they have generally led to lower transaction costs and efficiency. And he conceded that some traders engage in “shenanigans.” But when Rob Cohen, the SEC’s co-deputy chief in the Market Abuse Unit, talked about enforcement actions against spoofing (intentionally placing a large order that you do not intend to trade in order to trick others into thinking the market is going that way and to trade accordingly) and layering (placing several orders a few ticks apart to convey a buy or sell interest), the debate ensued. How do you know when an order is actually fake? How can you prove intent to defraud? What if a trader simply made a mistake?
Meanwhile, regulators try to stay one step ahead. Dave Shillman, associate director in the SEC’s Division of Trading & Marketing, outlined efforts to address market concerns through a consolidated audit trail, large trader reporting, and market information data analytics system (MIDAS), and well as proposed efforts on anti-disruptive trading rules. Jeff Mahoney, General Counsel for the Council of Institutional Investors whose members include pension funds, benefit funds, and asset managers—all with combined assets in the tens of trillions of dollars, noted that the overwhelming concerns among his constituents are simple: transparency, disclosure, and fairness. And why not charge traders for cancelling a trade?
What we can expect on the immediate horizon is a focus on what Shillman characterized as the most aggressive short-term strategies when the market is fragile. The question that still looms is what to do about technological advantages that benefit some market participants over others. Either way, we’re sure to see more on the role of algorithms in this space in coming months and years.
S.P. Slaughter
Follow me on Twitter: @SP_Slaughter
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