SEC HFT Enforcement Action Looks Nothing Like “Flash Boys”

On October 16, 2014, the SEC entered into an administrative settlement of an enforcement proceeding involving a high frequency algorithmic trader — Athena Capital Research, LLC.  But if you review the Administrative Order, which is available here (In re Athena Capital Research), don’t expect to see anything like the fanciful musings of Michael Lewis in “Flash Boys.”  In fact, there is no suggestion that high frequency trading might be unlawful outside of the complex, labyrinthine alleged manipulation scheme described in the SEC’s charges.

I won’t bother to try to describe the charges here because they are so complex.  But they involve an algorithm of multiple high speed buy and sell transactions at the close of the trading day designed to create a favorable price increase for Athena Capital in the after-closing auction.  The important thing is that the SEC did not assert that the problem was high frequency trading (HFT), but that HFT was a vehicle for pursuing “a familiar, manipulative scheme: marking the closing price of publicly-traded securities.”

SEC Chair Mary Jo White made it clear that it was the manipulative conduct that was key: “When high-frequency traders cross the line and engage in fraud we will pursue them as we do with anyone who manipulates the markets.”  SEC officials in the division of the SEC tasked with examining trading systems and practices previously expressed skepticism about Michael Lewis’s accusations and follow-on proceedings by New York Attorney General Eric Schneiderman.  See SEC’s Berman Says Critics Like Schneiderman Misjudge Regulator and SEC official suggests order cancellations not currently a problem.

Another interesting aspect of this proceeding is that the settlement occurred based on the respondent neither admitting nor denying the charges — meaning the SEC did not have the leverage to insist on an admission of liability — and, although there was a $1 million penalty imposed, the SEC did not seek any “disgorgement” of alleged unlawful profits — probably meaning they had a hard time proving significant profits actually occurred.

Straight Arrow

October 21, 2014

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