Recent civil and criminal enforcement action involving high frequency trading

Abstract

Purpose-To alert high frequency trading firms to the increased regulation and prosecution of manipulative trading practices during 2014 and early 2015. Design/methodology/approach-Reviews four significant proceedings against high frequency trading firms (and/or individuals employed by such firms) and other developments from the relevant government agencies as a possible preview of the enforcement and prosecution of high frequency trading practices in 2015. Provides advice to high frequency trading firms on how to decrease the risk of regulatory or criminal actions against them in this changing environment. Findings-Although the focus on high frequency trading has only recently begun to intensify, firms should be aware of the increased enforcement activity of the past year. These actions, both regulatory and criminal, have already resulted in large penalties and have helped initiate a strengthening of rules and regulations regarding manipulative trading practices, of which firms need to be aware and stay current. Practical implications-High frequency trading firms should be aware of the recent regulatory and criminal actions in order to better evaluate their own practices and controls, to ensure that their trading patterns do not resemble manipulative practices, and to avoid similar actions. Originality/value-Practical guidance from experienced litigators and securities regulatory lawyers, including a former SEC Assistant Chief Litigation Counsel and a former federal prosecutor, that consolidates and describes several recent actions and developments in one piece.

Order flow dynamics for prediction of order cancelation and applications to detect market manipulation

“…Additionally, speed is an important factor for spoofing as this strategy is implemented during high‐frequency trading as has been reported in Rossi et al. (). However, Lee et al.…”

“…As emphasized in Rossi et al. (), in October of 2014, Michael Coscia, owner of Panther energy trading was charged of performing spoofing in markets run by CME Group Inc, at which his trading system was looking for specific market conditions such as “price stability, low volume at the best prices, and a narrow bid‐ask spread.”…”

“…It is expected that traders and institutions follow the rules established by market regulators. However, this is not always the case and some traders and even automated trading systems (Rossi, Deis, Roche, & Przywara, 2015) misbehave and disrupt the trading activity in search of illegal profits. For this, agents implement strategies with names like ramping, wash trading, quote stuffing, layering, and spoofing, among others (Cumming, Johan, & Li, 2011).…”

Front‐Running Scalping Strategies and Market Manipulation: Why Does High‐Frequency Trading Need Stricter Regulation?

“…Although Moosa (2015) expresses the opinion that front‐running should be banned, the author notes that HFT did not cause the Flash Crash in 2010, that it is not as profitable as suggested, and that it is confused with other trading operations. In opposition to this view, Rossi, Deis, Roche and Przywara () highlight the increased enforcement on HFT activities with both regulatory and criminal actions that already resulted in large penalties and have helped initiate a strengthening of the rules and regulations related to HFT.…”

Learning unfair trading: A market manipulation analysis from the reinforcement learning perspective

“…Though research is extensive in the area of market manipulation, few develop generative models of what encourages these economic agents to follow the disruptive strategies. Furthermore, few of them provide recommendations to regulatory entities and/or firms [19] to encourage traders to stop this harmful behaviour. Different to the discriminative models that are intended to distinguish the manipulative behaviour from other strategies, we use the (PO)MDP approach to model spoofing/pinging as it predicts the behaviour of manipulators in terms of market conditions, thus providing a powerful tool for analysis of the causes of manipulative strategies, and suggesting possible remedies for market regulators.…”