SEC Is Hot On High Frequency Traders

May 22, 2013
By Vlad Karpel


What is High Frequency Trading?

High speed trading or high frequency trading (HFT) is when investors use computer algorithms and advanced technology to trade securities quickly throughout the trading period. In order for high frequency trading to be executed, investment positions may be held only for seconds or even less than a second. Traders engaged in high frequency trading depend on the speed taken to process their trades in order to take advantage of the profits.

In the past few years, investors figured out high frequency trading (HFT) and it was the biggest hit in Wall Street. However, this kind of trading was seen as most disruptive. High frequency trading on any given day accounts for half of all the business transacted in the stock market. According to critics, this has contributed to the flash crashes that are so frequent in the market these days.

Tracking Down HFT

In the United States and Europe, fines on traders have been imposed by agency regulators such as SEC for using computers to get an unfair advantage over other slow investors by unlawfully manipulating prices. They also suspect that there could be other market abuse among investors. After the flash crash exchanges have introduced circuit breakers to stop trading after violent moves.

In July 2011, the Securities Exchange Commission approved a “large trader’ rule which demands firms who engage in a lot of business to offer more information concerning their activities. The additional information will allow case regulators to easily track and trace their trades. This rule transcends to high-speed traders.

The Securities Exchange Commission has also proposed a high powered monitoring system called “consolidated audit trail” which will gather information or data on trades in real-time from every exchange in the United States. This will allow regulators to piece together events in the case of another flash crash.

SEC’s Midas

The Securities Exchange Commission’s Midas program is executed towards the efforts to observe the creation of newer technologies and to prevent traders using advanced technologies to take an advantage of normal investors. With the new Tradeworx program the SEC will have access to all the bids made to buy or sell stocks or shares on any of the public exchanges in the United States. The system works like the “x-ray” machine that allows SEC to identify if any trading firms are disrupting the market by rapidly submitting and canceling orders.

According to analysts, the Tradeworx program is the most efficient way for the SEC to catch up with the high frequency trading or high-speed trading industry. With the program, the SEC will rely on the official trading record which includes the price of all trades executed in any of the country’s public exchanges. Then, SEC will use this data to apprehend erring investors and to keep a close watch over the market. This data could allow the agency to analyze claims that certain firms take advantage of their faster data to overtake slower traders. It will also allow the agency to check complaints that sophisticated traders jam systems with large number of orders that slows down trading for others. With the system in place, the SEC is cracking down on high frequency trading.

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