Securities Regulators are Demanding Secret High Frequency Trading Strategies
The crusade against High Frequency Trading which Zero Hedge started well over two years ago, is now coming to an end. Reuters reports that 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.”
As everyone knows, the only thing of value within the sub-penny scalping HFT universe are the odd nuances in computer code. Which is why its supreme and undisputed secrecy is sacrosanct. As soon as anyone, especially a regulator, has a whiff of understanding how any given algorithm works, it becomes the equivalent of collapsing the wave function: observing the HFT theft-scalping duality in action eliminates the Schrodinger equation associated with any simplistic algo and collapses its “wave function” to a worthless series of ones and zeros. Said otherwise, this is the end for HFT.
More from Reuters:
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.
It’s all in the code:
Trading code is a high-stakes secret for high-frequency firms that battle each other to earn razor-thin profits on tiny price imbalances in the market. Such firms can make thousands of trades per second and provide much liquidity to the market.
High-frequency trading is estimated to be involved in more than half of all U.S. stock trading. Regulators have said the algos behind such trading were a factor in the flash crash, but that they did not cause it.
Carlo di Florio, who heads the SEC’s Office of Compliance, Inspections and Examinations, said the agency started asking firms for proprietary algorithmic trading data over a year ago, and has since more broadly incorporated such requests into its risk-based exams.
Most of the algo-related requests, he said, have been made to hedge funds that use quantitative trading strategies.
Although some lawyers and industry sources have said the SEC has asked for the actual computer code itself, di Florio said such a request is “very rare.” Instead, most of the time the SEC has been asking for research papers containing sensitive information about trade reasoning and proprietary formulas.
Luckily once the HFT scourge is over, it will finally return the market to a normal state of liquidity and volume, not the current churn of rebate paying stocks (all 10 of them in a universe of 5000). Yes, some liquidity may be lost. But what remains will set the basis for a return to true efficiency.
After this momentuous victory against the “robots”, the only event that could possibly top it, would be extrication (by force or otherwise) of the Chairsatan and his globalistic central planning cohort from capital markets.
At that point the stage for restoration of normalcy will finally be set.
In the meantime we will take it: one day at a time… until the war is finally won.
Tyler Durden is the founder of Zero Hedge.