U.S. securities regulators have taken the unprecedented step of asking high-frequency trading firms to hand over the details of their trading strategies, and in some cases, their secret computer codes.
The requests for proprietary code and algorithm parameters by the Financial Industry Regulatory Authority (FINRA), a Wall Street brokerage regulator, are part of investigations into suspicious market activity, said Tom Gira, executive vice president of FINRA’s market regulation unit.
“It’s not a fishing expedition or educational exercise. It’s because there’s something that’s troubling us in the marketplace,” he said in an interview.
The Securities and Exchange Commission, meanwhile, has also begun making requests for proprietary algorithmic trading data as part of its authority to examine financial firms for compliance with U.S. regulations, according to agency officials and outside lawyers.
The requests by SEC examiners are not necessarily related to any suspicions of specific wrong-doing, although the decision to ask for it can be triggered by a tip, complaint or referral.
According to interviews with attorneys, traders, industry executives and regulators, the unusual requests for algo code and other computerized trading strategies really ramped up this year and have targeted stock-trading firms such as broker dealers and hedge funds.
It has alarmed some traders who are afraid their “secret sauce” — intellectual property sometimes developed over years and at great cost — could get into the wrong hands, especially when SEC and FINRA examiners leave for the private sector.
http://www.reuters.com/article/2011/09/01/us-financial-regulation-algos-idUSTRE7806J420110901
I am thrilled that the SEC has seen that these traders are indeed a major cause of the volatility in the marketplace. We have now reached a point where market fundamentals do not apply to trading strategies. Company earnings, growth forecasts and other fundamentals are a thing of the past. Today’s traders collude, manipulate, use inside information and wreak havoc on the retail (and in many cases institutional) investor – high frequency trading does not care about company fundamentals. Their formulas work exclusively on down ticks and up ticks. They are designed to make a penny of profit but with several millions of trades per terminal and 100′s of HFT Algos/Codes worldwide… It’s your Guess!
I believe some trading practices utilised by HFT trading firms and other automated trading firms may pose problems for long-term investors. I support action by regulators (FINRA & SEC) to clearly define practices that may constitute market abuse to ensure adequate regulatory consequences for these practices. They must evaluate trading practices implemented by (HFT) auto Algo traders.
Thanks Robbie & NHP for your input!