The Wall Street Journal reports that the SEC has sent out subpoenas to firms engaged in high-frequency trading (“HFTs”) as a part of its probe into last year’s “flash crash.” The SEC and CFTC released a report last year that lists high-frequency trading as one of the reasons behind the crash.
Regulators are trying to understand which particular actions by high-frequency traders (or cheetahs, as CFTC Commissioner Bart Chilton has dubbed them) contributed to the market’s precipitous decline. It also seeks more information about some of the industry’s more questionable practices, such as “spoofing,” “layering,” and “quote-stuffing.” These strategies generally involve placing misleading orders to confuse market rivals or leapfrog the trading line.
HFTs, once a niche group, are now a a dominant force in the securities market, making up over half of the equities trading volume. Though exact percentage is off from its 2009 high of 61%, it is still a substantial share for a trading mechanism that was technologically impossible twenty years ago.
Regulators worry that rules have not kept up to date with technology. In the United States, the CFTC has partnered with the SEC to asses the role of HFTs, and Chilton’s cheetahs may ultimately find themselves penned in by new regulation. Overseas, the European Securities and Market Authority (“ESMA”) published a proposal for managing HFT risk. Yet even as the proposals are debated, electronic systems continue to foment uncertainty. Last Friday, high message volume brought down NYSE Liffe, the second-largest European derivatives trading platform, for an hour and a half. This is the platform’s sixth glitch in two months.