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The FBI will join the SEC in investigating high frequency trading technology for potential market manipulation, the FT reports.The two agencies have had success working together before. Over the last 3 and a half years, they’ve managed 80 successful insider trading prosecutions.
But this this issue is much more complicated that who knows what. Now the two agencies will be dealing in dark pools, private exchanges where investors trade blindly with one another, and hedge funds and other firms that use complex, super fast algorithmic codes to execute their trades.
The SEC’s Quantitative Analysis Unit is focusing on the emergence of high-frequency trading firms and the rise of dark pools. Traders using these methods can manipulate the market by flooding it with quotes, known as quote stuffing, or placing millions of orders that are quickly cancelled, to drive others to trade in ways that benefit their position, a practice known as layering…
Authorities are exploring potential holes in the system, including new algorithms referred to as “news aggregation” which search the internet, news sites and social media for selected keywords, and fire off orders in milliseconds. The trades are so quick, often before the information is widely disseminated, that authorities are debating whether they violate insider trading rules, the people familiar with the matter said.
Authorities are also monitoring alpha capture systems, platforms where sell-side firms share information with buyside professionals, for potential front running or insider trading. Also on their radar is artificial intelligence trading, an algorithm that predicts market reactions based on history.
This is something critics of HFT have talked about for some time. Since the 2010 Flash Crash, when the stock market lost 9% of its value in moments, investors of all sizes have been concerned that trades are moving too fast.
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