Are High Speed Trading Practices a New Form of Market Manipulation?

 

Regulators in the U.S. and abroad are reportedly cracking down on certain trading practices associated with high-speed electronic trading, but have yet to develop a comprehensive strategy or an effective means to carry it out.

“It’s about time that regulators started dealing with the issues associated with high speed computerized trading,” said investor’s attorney J. Boyd Page of Page Perry. “These activities account for the majority of trades on the exchanges and are largely responsible for the tremendous volatility that occurs within a matter of minutes in the markets. Serious analysis needs to be done to determine whether the tactics employed by these firms are just newer versions of market manipulation.”

High speed trading is done by independent firms (e.g., hedge funds) and special desks that operate like hedge funds inside Wall Street firms. It is estimated that high-speed computerized trading accounts for between 50% and 67% of equity trades in the U.S. It has expanded into other U.S. markets as well, including the futures markets, where parties contract to buy and sell commodities for future delivery, and such contracts are themselves bought and sold by speculators who never hold or take delivery of the underlying commodity.

Regulators worry that the dynamics of high-speed computerized trading are largely unknown and that it could spin out of control. Something like that happened in May 2010 and became known as the “flash crash.” Some experts say that the flash crash is just a prelude to more damaging scenarios yet to come.

Regulators have so far focused on a practice called “layering.” This involves issuing and quickly canceling a huge volume of trades that were never meant to be carried out. The purpose is allegedly to mislead other investors. Pension funds and other long term investors complain that layering causes them problems. As a result, some large long-term investors have moved their transactions to private exchanges called “dark pools.” One consequence of that is a disparity of securities pricing in dark pools versus public exchanges.

British regulators fined a firm called Swift Trade the pound equivalent of $13.1 million for layering. Swift Trade reportedly dissolved last year.

Last year, the Financial Industry Regulatory Authority (FINRA), which is charged with regulating broker-dealer sales practices in the U.S., fined Trillium Brokerage Services and some of its employees $2.3 million for layering.

One expert interviewed by the Wall Street Journal, Albert Menkveld, associated professor of finance at VU University Amsterdam, said regulators presently lack the resources needed to monitor high-speed electronic trading. They need to become more electronic themselves, because they are not now equipped to process all the electronic trading.

Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.