FINRA’s fining of Trillium, a small New York brokerage firm that trades high frequency and allegedly tried to exploit other HFT firms, comes at a crucial time in the HFT regulation process.
Later this month Mary Schapiro will announce the SEC’s conclusion about what caused the May 6 “Flash Crash” and it’s expected that she will, at the same time, propose new regulations on high frequency trading.
Whatever she says – everyone’s waiting to hear it. She could propose a number of new regulations which we go into detail about here. Or she could totally vindicate high frequency trading and say it had nothing to do with the Flash Crash.
We expect neither – we think she will propose a limit on the price parameters that a bid can fall between, because she more or less said as much.
But the point is, there’s a lot on the line for high frequency trading right now.
One of Schapiro’s main points was that, although she couldn’t (in the past – now, with this fine, there’s a much greater chance that they can) prove market manipulation was happening, or that “quote-stuffing,” (Basically, flooding the market with quotes on which high frequency traders never intend to trade. The theory is that they’re drawing out the best offer and making it appear like there’s much more trading volume in a stock than there actually is. They trash the market with quotes then just cancel them a split second later.) was happening, the only thing that matters is that everyone suspects it is – and therefore the confidence in the market is way down – and something has to be done.
And here this fine comes along – the very first ever – and suggests that regulators are able to fault HFT firms which participated in quote-stuffing with wrong doing. It’s perfect timing. So high frequency trading firms that operate legally should feel more confident that new regulations might not be stringent. And this should be a harbinger of retail investors’ and day traders’ new confidence in HFT.
We are a little confused about whether or not Trillium was actually using high frequency trading strategies when they quote-stuffed. It seems like they might have actually just manipulated other firms’ high frequency trading algorithms.
And of course the fine actually took place back in June and FINRA publicized it two weeks before Shapiro’s announcement, which might just be convenient, or it might mean they aren’t close on any more findings like this.
But luckily, neither much matter.
It still stands that FINRA fined a firm for quote-stuffing. And Trillium’s actions – they bid without the intent to trade by purposefully pricing bids outside a reasonable price range (so that their trades most likely wouldn’t be bought against their will) – are exactly in line with what Schapiro has been focusing her complaints on.
Last week, Shapiro said this:
“Our next steps are likely to include a careful review of a limit-up/limit-down procedure that would directly prevent trades outside specified parameters, while allowing trading to continue within those parameters.”
She was speaking in anticipation of her announcement later this month, when HFT regulation is expected to get an overhaul – or the beginnings of one – from the SEC. The upcoming regulations are a contested issue. They could be hurtful to the industry – and market liquidity, because of the 60% volume HFT firms provide.
But of course most HFT firms operate 100% above board and should not be faulted for a few bad apples, so many felt new regulations would punish them unfairly.
That’s why this fine comes at a perfect time. FINRA’s fining Trillium $1 million for quote-stuffing is a landmark decision. There was very little faith that FINRA and the SEC could regulate HFT to the point where confidence would return to the market. But there’s a little more now. They needed a case like this, and they did it. Let’s hope FINRA can do it again and the SEC can follow their lead.