Regulators Focus on HFT Market Abuses: New Techniques, Enforcement of Dodd-Frank

Actimize FMC Product Team, Financial Markets Compliance

While Panther Energy Trading LLC made recent news by being fined and banned for one year by the regulators this week, these types of violations of the law are becoming more common with the advent of high frequency trading.

With heightened awareness of Dodd-Frank, providing the explicit directive to ban spoofing, regulators themselves will need to step up their commitment to deter these illegal activities with the adoption of more sophisticated tools that detect manipulative behavior as it occurs. This is in contrast to waiting several months to be made aware of the manipulation that has occurred.

Without meaningful trading bans, many firms will find other ways and strategies to continue to manipulate the marketplace. Regulators need to rethink the length of time for trading bans to send a clear message to the trading community.

In addition, regulators globally need to re-evaluate the monetary fines and length of time they want to impose on trading bans for these kinds of violations to be fully stopped or, at the very least, curtailed. Regulators should strive to create an atmosphere in which traders that may intend to violate the rules think twice before they take action, knowing full well that regulators will be coupling stiff, harsh fines with a lifetime ban.

Some of the leading regulators have hired former traders to help bolster their ability to detect and prosecute unfair trading practices, since they have a more practiced insight into what is reasonable and customary in high frequency trading practices. Most industry insiders agree that this is a sign of things to come and not just a “one-off” practice.

Trading technology has advanced significantly in the past few years – and surveillance technologies have also advanced in step. However, the gap has often been that these technologies have not been implemented in lock step with the advancements on the trading floor.

Lack of transparency breeds confusion and concerns. Does high frequency trading lead to market abuse itself? No, market abuse and the types of organizations and individuals that perpetrate it have been around for years. But advancing technology has changed the game considerably.

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