US exchanges accuse of illegally providing benefits to high-frequency traders

Published on January 20, 2018

US exchanges accuse of illegally providing benefits to high-frequency traders

    Image: Spiros Vathis | CC BY-ND 2.0

    In 2014, Michael Lewis published the book “Flash Boys” - it talked about the structure of the high-frequency exchange trading industry and described not always completely honest methods used by traders. The book became a bestseller and caused a wide public outcry.

    Moreover, in its wake, the authorities became interested in the activities of high-frequency traders, and lawsuits were filed against some HFT firms. No visible results of this activity was not followed in that period, however, as it became known publication The Hill, the proceedings are still going on.

    2014 Claims

    Regulators and lawyers, after the release of 'Flash boys', began to check exchanges for providing benefits to HTF merchants. According to the allegations, exchanges created the conditions under which such traders received trading data earlier than others, which allowed them to use front-running tactics to manipulate prices. HFT currently accounts for most of the trading volume on US exchanges, so trading floors are interested in attracting such players.

    In addition to lawsuits filed back in 2014, regulators took a number of actions aimed at strengthening control over the HFT. So the US Securities and Exchange Commission (SEC) developed the siteDepartment for the presentation of data and analysis of market structure. Later, the agency invited trading experts and created the Stock Market Structure Advisory Committee (EMSAC), which dealt exclusively with high-frequency traders.

    What is happening now

    On December 19, the US Federal Court of Appeals reinstated the lawsuit against several exchanges, including the NYSE, NASDAQ, BATS Exchange, and Cboe. At the moment, representatives of exchanges have not responded to the charge, although they had previously denied their guilt.

    The lawsuit claims that the exchanges, knowing the consequences, provided HTF firms with faster access to trading data, to the detriment of other investors. In turn, the exchanges claim that the placement of traders' servers in the same data center as the exchange trading system, as well as direct connection comply with SEC standards.

    They also argue that HFT firms invest heavily in the development of financial technologies, which gives them the opportunity to compete for trading volumes, improve liquidity and increase market efficiency for all investors.

    Meanwhile, EMSAC has been studying various aspects of HFT's activities for several years, but has not yet provided a clear justification for allegations of front-ranking.

    Representatives of the Modern Markets Initiative organization, which support high-frequency traders, draw attention to the fact that there were no clear explanations regarding claims to HFT trading, as well as how the front-line scheme described in the book “Flash Boys” can work in the current market structure. In addition, no information was received from other market participants who could confirm that the charge against the traders really had a place to be.

    According to the president and chief executive officer of the CFA Institute, Paul Smith, these questions need to be answered once and for all, since the topic of confidentiality and trust in the market cannot be left to chance. Financial technologies are crucial for stock trading, but not when they are used to manipulate the market.

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