We first heard about the SEC’s increased focus on high-frequency trading in June 2014 when the SEC announced its desire to promulgate new rules on high frequency trading to address the lack of transparency in dark pools and alternative exchanges and to curtail the use of aggressive, destabilizing trading strategies in vulnerable market conditions. However, the SEC and other regulators may not need to rely on new rules to regulate high frequency trading. The United States Commodity Futures Trading Commission special counsel Greg Scopino recently published an article in the Connecticut Law Review arguing that certain high frequency trading tactics violate federal laws against spoofing and wash trading.
Michael Lewis’ new book Flash Boys: A Wall Street Revolt has caused a commotion on Wall Street, on Capitol Hill, and with law enforcement agencies. The SEC is the latest government agency to examine and propose new rules on alternative exchanges and high-frequency trading. The SEC’s latest proposals and enforcement actions raise questions about the agency’s plans to effectively regulate and enforce these activities and its ability to do so.
In Flash Boys, Michael Lewis—author of Liar’s Poker, Moneyball, The Blind Side, and The Big Short—follows a “small group of Wall Street investors” who he says “have figured out that the U.S. stock market has been rigged for the benefit of insiders and that, post-financial crisis, the markets have become not more free but less, and more controlled by the Big Wall Street banks.” High frequency trading is a type of trading using sophisticated technological tools and computer algorithms to rapidly trade securities in fractions of a second to profit from the slightest market blips. High frequency trading is done over traditional exchanges. In contrast, dark pools are alternative electronic trading systems conducted outside traditional exchanges that institutional investors use, sometimes to hide their trading intentions or to move the market with large orders.