As concern over High-Frequency Trading (HFT) increased internationally, the European Union (EU) voted to approve new trading regulations on April 15, 2014, that are intended to target HFT. “With these rules,” according to the EU financial services chief Michel Barnier, “the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world.” Although he acknowledged that HFT may bring some benefits, Mr. Barnier expressed concern that “we need to make sure [HFT] doesn’t cause instability, and isn’t a source of market abuse.” In the United States, however, KBW, the financial services boutique, predicts that Congress is not likely to take any legislative action to curb HFTs. Instead, the Securities and Exchange Commission (SEC) is expected to deliberately and methodically review HFT and could introduce pilot programs and increased disclosure requirements.
Unlike KBW, Scott O’Malia, a Republican commissioner, is not so optimistic about the SEC and the U.S. Commodities Futures Trading Commission (CFTC) abilities. He says that the CFTC is not keeping up with high-speed derivatives trading and needs to invest in tools to detect manipulative and disruptive practices. In 2012, the SEC spent $2.5 million on a surveillance system named Midas (Market Information Data Analytics System) that collects information from the 13 public exchanges in the United States. Essentially, the SEC has the same view of the market that speed traders have. Around 30 percent of trades, however, do not occur on the public exchanges, meaning the SEC does not view them. Gregg Berman, one of the SEC’s top advisers on HFT and other elements of computerized markets, disagrees. His reasoning, however, is that Midas collects price data from all U.S. exchanges. Midas, then, at least means the SEC is not ignorant of the practices.
Along those same lines, when seeking confirmation as chair of the SEC in March 2013, Mary Jo White told lawmakers that understanding HFT’s impact on the stock market would be a “very, very high priority.” More than a year later and nothing has changed, leaving many to wonder when and if new regulations are forthcoming. The SEC states that it is looking into HFT to determine whether there are any insider trading violations, but has taken no steps to otherwise curb the practices. That is inexcusable.
Thus far, the closest the SEC has come has been a $4.5 million settlement with the New York Stock Exchange and two affiliated exchanges. That involved their failure to comply with the responsibilities of self-regulatory organizations (SROs) to conduct their business operations in accordance with Commission-approved exchange rules and the federal securities laws. Notably, however, the charges dealt mostly with technicalities (reporting rule changes to the SEC). On the bright side, one charge was for co-location fees (a practice discussed in an earlier article), but it again related to the absence of a rule on point, not that co-location was a fraudulent or unfair business activity.
Alternatively, and also according to the report issued by KBW mentioned above, “the most probable near-term action against HFT would come from the state Attorney General offices, most likely the NY AG, and would be targeted at specific market participants rather than the broader industry.” As we discussed in an earlier article, the NY Attorney General is already looking into HFT, as is the SEC and the FBI. Still, until there are some regulatory or legislative changes, it looks like the investing public is on its own. If you need more information on this subject contact Rebecca Gilliland, a lawyer in our firm’s Consumer Fraud Section, at 800-898-2034 or by email at Rebecca.Gilliland@beasleyallen.com.
Sources: www.businessweek.com and www.sec.gov
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