High-frequency trading is the latest craze hitting the market. Popularized by Michael Lewis’s Flash Boys, high-frequency or high-speed trading involves the use of sophisticated technological tools and computer algorithms to rapidly trade securities. According to Bloomberg BusinessWeek, high-frequency trading has been “blamed for making stock exchanges less transparent and markets more volatile [and] has disrupted the process of trading stocks that determines the value of public companies.” Yet, I was recently told by counsel for the Securities and Exchange Commission and FINRA (at a 2014 Securities Litigation & Regulatory Update CLE in Philadelphia) that there is “nothing inherently bad” about high-frequency trading. That said, these agencies are still looking for ways to safeguard investors.
FINRA recently approved various proposed rule changes regarding high-frequency trading, aimed at increasing transparency. Additionally, the government has prosecuted traders for using high-frequency trading technology to manipulate the market. For example, in October, the SEC fined an investment company for manipulating the closing prices of securities with a flurry of last second trades before the market closed. That same month, the U.S. Attorney’s office in Chicago indicted a trader for placing and then rapidly cancelling orders to manipulate perceived demand, a tactic that has become known as “spoofing”.