Markets technology and laws respond to high frequency trading investor abuse with a range of responses from doing nothing to a new exchange developed with level technology playing field. Proposals to counter HFT also include technology speed bumps, taxes and new regulations. But most is regulator talk with no action which means no market, trading or investment fix addresses markets rigged for HFT. Time will tell if anything gets changed by lawmakers and regulators. Meanwhile, the HFT advantages over investors continue, so individual investors must learn how to respond and avoid the abuse.
What you learn from this lesson:
Markets technology and laws respond to high frequency trading:
Markets, technology and laws respond but there are a broad range of reactions. They range from doing nothing to a proposed reordering exchange regulations. Therefore, any response may affect the future of your trading and investment results. So you need to be aware of these possibilities. The lesson gives you a good look at the range of responses to HFT market rigging. Knowing and understanding how these responses help you grow as an investor. Knowledge of the potential changes prepares you for the investing future.
Frequently Asked Questions about Market technology and laws respond to high frequency trading
Has anyone responded to high frequency trading?
Responses to high frequency trading have come from many individual investors, investment professionals, regulators, exchanges, financial service players, and endless media reports. They range from sharp criticism to cheerleading, but, in practical terms, the responses mean little. Responses vary but in real terms, nothing happens. High frequency trading is here to stay, do as it wishes, and affect investor money and trades. Although, some markets, technology, and laws have replied with trading speed bumps, taxes, and an entirely new stock exchange established that removes the high frequency trading advantages. By neutralizing inside advantages, that exchange brings market forces to address the issues.
Does high frequency trading manipulate markets?
High-frequency traders manipulate markets using their inside access, unmatchable technology-powered speed, vast order quantities, and massive trade volumes, distorting prices and creating unfair advantages.
Front-running happens when HFT orders get placed at the front of the line after knowing the orders of all others. Spoofing and quote stuffing flood the market with many orders to create confusion or slow down other traders' systems.
Their misinformation production and calculated strategies disrupt markets' integrity, fairness, stability, and quality. They use a manipulative trading strategy, banging the close, affecting prices and market quality.
Will high frequency trading get regulated?
Regulation of high frequency trading varies by jurisdiction. Some completely ban it, others have restrictions, some with few controls or conditions, but the balance, including major exchanges, participate as allies sharing in the bounty through high fees paid for inside access and advantages. However, the debate continues to ban or impose more restrictions or controls on high frequency trading. Like most changes in regulations, any further change will likely be slow to arrive.
How have markets responded to high frequency trading?
High fees bought support for high frequency traders from major markets and other powerful allies to ensure high frequency trading advantages over large and small investors. In contrast, other markets introduced restrictions like technology speed bumps or made efforts to attract opposing market forces, and some introduced a fee or tax on trades. As more investors, regulators, and legal minds pay attention, additional responses to market rigging by high frequency trading are possible. But don't hold your breath waiting. For now, responses vary from doing nothing to establishing an entirely new stock exchange that avoids and prohibits giving high frequency traders any advantages. Possible changes being considered may affect future trading and investment results.
Do all markets ignore high frequency trading risks?
No, but market responses to high frequency trading vary by jurisdiction from those who are an associated ally, to indifference, or complete bans. Most markets have concerns about the possibility of market disruptions. As a result, in some markets a “kill switch” allows any member firm to turn off trading should a preset risk exposure get hit. Other markets using trading circuit-breakers, first introduced in 1987, to stop any trading panic, have updated to cope with high frequency trading. Proposals that high frequency traders code risk controls into their algorithms have little chance of success.
Changes as markets technology and laws respond to high frequency trading
The effects of HFT on investor money has stimulated a range of responses from individual investors, some regulators, exchanges and some in the financial service industry. However, in general, HFT has done as it wishes. For years HFT paid to influence stock markets to make changes giving them very profitable advantages. As a result, they succeeded in keeping managements of most exchanges and regulators on side with rich revenue streams. To be sure, offers of streams of fat fees was very persuasive and it seems to have done the trick! Exchanges stoutly defended HFT.
However, change, the market’s constant companion, may now make a difference. Market technology and legal responses could bring changes. If so, that could shift markets to remove some or all the tilt that favors HFT.
As a result, changes that could be on the way for investors include:
First purpose built exchange begins influencing markets
The new IEX Exchange leads the movement to change markets to offset HFT. Their project builds on a series of innovations. To begin there is an innovative technology speed bump, they could tilt markets. In that case, the IEX tilt would be to level the field. So, the following section of this lesson gives their innovations further coverage.
Other Exchanges also begin to propose changes
When IEX began operations pressure increased on other exchanges to respond. Several copycat versions of the speed bump appeared. However, other innovations and technology are under consideration as well.
Legal responses to high frequency trading
Court challenges have begun with suits in several nations. It is possible that legal actions may complicate on-going market and trading operations. Also they may complicate any regulation of HFT.
Tax possibilities proposed by several jurisdictions
Politicians in multiple markets saw taxing HFT as a way to fight for the “common man”. It returns again and again as a tax the rich idea but shows little traction.
Even the SEC may finally respond with regulation
Showing signs of life, the SEC eventually showed up. As always, underfunded and outgunned regulators are well behind market developments around HFT. Most likely an SEC response with be to continue to “study” the issue and talk of regulation but produce little real action.
IEX Exchange leads the change as markets technology and laws respond
The biggest reply to the HFT stock exchange fixes has been the IEX Group. Considering, Markets technology and laws respond, the IEX is the premium reaction to HFT. It happened when the IEX Group founders had a brilliant insight. Given their insight, they saw a way forward and a way to overcome the HFT market rigging. As a result of realizing that only a market force response could affect any real needed change, they set about doing just that.
Their creation was the IEX Exchange to combat the effects of HFT. They wanted to apply market forces to the HFT marketplace. Doing that would overcome the market enabled rigging.
We first met the IEX Group in Lesson 5. At that time we learned that they were at the heart of the story outlining how the media exposed HFT to the general public.
Tom Scott tells the IEX story in a four minute video. Click the link to see
For an excellent introduction to IEX, check out Tom Scott's video. To see it, look on YouTube or use the following link: Slowing Down A Stock Exchange With 38 Miles Of Cable by Tom Scott tells the IEX Exchange story.
In that story, as Tom Scott summarizes, “High-frequency traders...gather price information faster than anyone else, sometimes even faster than the markets themselves, and use that to make a tiny profit many, many, many times. There are all sorts of solutions: but it turns out there's a simpler one that involves physics.” The physics involved are captured in the IEX technology speed bump.
IEX fights the exchange shakedown
Putting the IEX technology speed bump at the heart of their solution, IEX Group Inc. began an efforts to reset the investing playing field. That elegant and simple solution applies market forces to HFT by removing their insider advantages. As a result, IEX forge a path to serve investors without exposing them to HFT advantages. By cutting the HFT advantages out of IEX, established a for-investor fair exchange. Dealing with the unfair HFT advantages other exchanges enabled, makes IEX unique. Founder Brad Katsuyama and partners planned several innovations to counter the HFT schemes.
With many billions at stake it is no surprise that IEX has some powerful and wealthy enemies. Time and again those opponents have shown they have great SEC influence. Even now, that continues to constrain opponents of the HFT cabal.
Development of IEX is a chapter in the epic battle of wealth, time and fairness. Meanwhile, SEC approval of IEX proceeded at a snail’s pace. For it to happen took years. As a result, we can only conclude it showed the power and influence of the HFT cabal. In effect the HFT bunch were willing to use any means possible to stop any opposition to their HFT scheme.
The IEX Group pros can tell their new exchange story better than anyone
The following was copied from the IEX website:
“IEX Group is on a mission to build fairer markets. Founded in 2012 and headquartered in New York City, IEX Group introduced its first trading venue in 2013 and launched the Investors Exchange (IEX), an independent U.S. stock exchange, in 2016.”
“IEX exceeded 3.3% of intraday market share in U.S. equities on November 1, 2018 and averaged approximately $11 billion in U.S. equity trading per day for the month of October. IEX listed its first public company, Interactive Brokers, on October 5, 2018. Learn more at iextrading.com.”
7 IEX innovations change markets
Listed below are the core 7 IEX innovations that level markets for investors:
Speed bump technology - First innovation
At the core of the IEX plan is a technology speed bump. The IEX speed bump aims to combat predatory HFT. In order to do that, the speed bump adds 350 microseconds to all orders. Even that tiny time addition lets the matching engine process NBBO before any sales.
You will recall NBBO, we discussed in Lesson 8. In that lesson we covered the SEC required national best bid and offer price that must be available to everyone. As well, and also from earlier lessons, we know a matching engine is the computer heart of each stock exchange.
With the matching of orders gets made before HFT can react, the speed bump removes their ability to be first to trade. As a result, the HFT price advantage is gone. Taking away their best price advantage happens by slowing HFT down by that tiny 350 microseconds. As a result, IEX nips or removes the HFT speed advantage on their exchange.
IEX has other plans and policies to level the playing field and remove the tilt of markets favoring HFT. For example, their technology speed bump is first and leading innovation. Second is their decision to offer no colocation service. One outcome of not letting HFT colocate keeps their trading a level field. That means IEX does not let HFT servers locate in their exchange next to the matching engine.
Colocation services not offered - Second innovation
Keeping IEX colocation free eliminates the potentially profitable revenue from selling that inside service. By doing that, IEX became the first exchange proposing and actually not sell out investors for a huge stream of HFT colocation fees.
In contrast, other exchanges took those colocation fees and sold out investors to give HFT an inside track to markets. By doing that, and selling HFT server locations close to their exchange matching engines, HFT consistently sees data before investors. By not providing those services, IEX removes another HFT advantage that tilts to rig markets.
Special data access not offered - Third innovation
IEX provides no special access to data. HFT pays exchanges many millions for premium data feeds. Those feeds let them see investor orders from brokers and exchanges. That has the effect of giving them advanced looks at your and all other investor orders. Doing so lets them trade against those orders for guaranteed profits time after time. In contrast, IEX provides no special data access.
Liquidity rebates not offered - Forth innovation
IEX offers no rebates to liquidity providers. As a result and by charging the same flat trading fee to all buyers or sellers, the trading floor gets leveled. Imagine, the IEX Group comes up with the innovation of a level trading floor and a fair price!
Custom HFT orders banned - Fifth innovation
IEX innovation of restricting orders to stop all custom HFT orders. This innovation counters order types created for HFT. Those unique order types get used to manipulate markets to the advantage of HFT. Eliminating HFT custom orders makes them focus on four basic orders types. Those order types are: market, limit, midpoint peg and fill or kill which has been branded as the IEX Check.
Fifth IEX innovation: banning HFT special orders:
1.
Market orders are buy or sell orders immediately executed at current market prices. Used when investors need or want to be sure the order gets filled.
2.
Limit orders are buy or sell orders at a specified price or better. This order gets used when the investor wants to control or limit the price of the fill.
3.
Midpoint peg gives the buyers a price between the current bid and offer.
4.
Fill or kill orders take the entire fill or cancel to eliminate partial fills.
Proprietary trading affiliates banned - Sixth innovation
IEX has no proprietary trading affiliates. By doing that, IEX eliminates any possible conflicts with clients. Therefore, conflicts that can happen when private exchanges operate as dark pools without transparency, can not happen on IEX. As a result, circumstance that are common when banks or brokerages own exchanges, including dark pools, are avoided by IEX.
By offering that innovation, no proprietary IEX trading can happen which could take advantage of customer data. In contrast other exchanges can not give such an assurance. A major reason is the lack of transparency on other exchanges. On those exchanges without transparency, customers are never aware or sure.
Investors and buy-side institution own - Seventh innovation
Investors and buy-side institutions own IEX. That has been done with ownership restrictions to individual investors and buy-side institutions. Those ownership restrictions themselves are the seventh IEX innovation.
In contrast, other stock exchanges have owners that get direct trading privileges on those exchanges. On IEX no owner has direct trading privileges on the exchange. As a result, when other exchanges with owners linked to trading firms, there is a built-in conflict. That distinguishes IEX, because orders of the IEX owners, like all orders, must go through brokers. On conflicted exchanges, owner orders can directly access the exchange. Unlike like your and my orders do. That innovation levels the playing field on the IEX exchange.
Buy-side ownership interest includes private equity funds, mutual funds, life insurance companies, unit trusts, hedge funds and pension funds. Those common buy-side firms focus on investing results, not sell-side activity. That also contrasts with the ownership interests and privileges on other exchanges.
This brief summary does not do justice to the IEX story. That story involves much innovation and courage. From the beginning they said no to giving any player a market advantage over other investors. Those details are well told on their website. So use this link to check it out to learn more about the IEX Exchange and IEX Group.
SEC white paper says IEX improves markets
At least some SEC staffers recognized the vision in the IEX dream. As an example, one report covers their well founded market benefits. And that report also notes that IEX is a counter to aggressive HFT tactics.
Should you want to read the report, a link follows. Just click the link to access a white paper detailing how IEX improves markets. In essence, it reports how better markets happen when quality and price discovery improve.
SEC white paper by Hu, E. (2018): Intentional Access Delays, Market Quality, and Price Discovery: Evidence from IEX Becoming an Exchange. The link is to a PDF from the SSRN Electronic Journal.
Exchanges respond as well when markets technology and laws respond to high frequency trading
Beyond IEX, some established exchanges also react as markets, technology and laws respond to HFT investor abuse. Following the need to battle for years on a long road to open the IEX, the day finally came. And as expected the evolution of IEX means markets have changed. As a result, markets or more correctly, exchanges, are now forced into the process of responding to their innovative changes.
One by one other exchanges have realized the need to get in front of changes that are clearly on the way. So see the following sections for some of these changes. Eventually, and although almost incredible, the innovative technology speed bump is now on its way to becoming an exchange standard!
ICE turns on a second light of hope
If IEX was the first exchange to turn a light on in the dark HFT tunnel, the Intercontinental Exchange (ICE) was next. And once ICE turned on a second light in early in 2019, it seems the use of technology speed bumps will grow.
While IEX gets unfairly called small time. ICE are certainly big time players. ICE owns 12 financial and commodity markets including the big daddy, NYSE. Beginning in Feb. 2019 they propose to scrub the HFT advantage in their gold and silver futures market.
This huge change is the first crack in the wall of exchange resistance! After IEX this is the second exchange to propose taking away the HFT speed advantage. In this case the speed bump will stop some gold and silver manipulation.
Like IEX, ICE proposes to scrub the HFT speed advantage with a technology speed bump. Perhaps this is the beginning of a trend as exchanges step back from the edge of the abyss!
ICE proposes to build in a 3 millisecond delays to scrub the HFT advantage. One result of this innovation, named Passive Order Protection or POP, it could be a sign of more technology innovations to come for all markets!
Aquis Exchange slams a European door as markets, technology and laws respond to high frequency trading
Then a third light goes on! Aquis Exchange is a pan-European independent exchange that banned HFT in 2019! The market responded by doubling their market share in 5 months! That is a market force response!
The change stopped parasitic HFT frontrunning cloaked as market making. Finally these guys have it right! They call out the HFT market making for what it is, parasite trading praying on investors.
HFT is not market making but a shakedown taking cuts off investor orders at zero risk. These schemes are effectively, if not legally, front running. You may recall, in Lesson 6 we covered those explanations in detail.
As alternatives become available to investors, front running HFT strategies may become ineffective. They could get turned on themselves. Investors and fund managers can avoid venues and trades that give HFT advantages. That could become the market force that did. It could stop HFT manipulation in rigged markets. That could change markets and investing for the better.
Speed bumps promise increased fairness
Imitators continue to pick up the IEX speed bump idea. Several more exchanges announce or acknowledge considering the use of speed bump technology. This could take time but could mark the beginning of the end of investor abuse by HFT. That will certainly be evidence of technology put to good use. Markets, technology and laws respond to hit HFT in the bottom line. That can bring change to markets.
Exchange circuit breakers, kill switches and trading halts
A series of crashes and spikes forced exchanges to act. Most developed a circuit breaker or trading curb strategy. Such strategies combine management and technology halting trading when markets move too quickly.
Preventing market crashes or extreme spikes is the reason for these dampening efforts. Once established, these market stabilizing tools should prevent market crashes. Market spikes, plunges and disruption get tied to HFT.
As noted in Lesson 10, HFT can disrupt markets, investors and undermine confidence. To counter some of those effects, circuit breakers can contain disruption. That happens when circuit breakers or kill switches stop trading during a disruption. As a result, a kill switch can instantly stop trading. Doing that prevents an exchange event from cascading across Globally interconnected markets.
By both stopping trading and cancelling open orders, kill switches stop and clear the exchange processors. At the same time, they also impose a trading halt on that exchange. When needed on a particular market, the simple bit of technology has saved the day. Market time out work when needed.
Law, courts and lawmakers
Beyond technology and market forces, others have turned to the law. But, with no regulatory response, they will have to fight on their own. Even in the case of a class action lawsuit claiming stock exchanges defrauded investors, the uphill climb will be long.
That class action argument is based on fraud. In that case, the argument becomes the claim that fraud happened when the exchanges let HFT in. And the suit names 7 exchanges. It tries to argue that once HFT gained access they could play their inside game.
As in any suit there must be a lead complaint. In this case, that lead complaint is, Providence, Rhode Island. In addition there are pension plans who have joined in what will be a very long fight. In that case, any settlement will be a long time coming. As well, in the suit, the named exchanges include BATS Global Markets, Nasdaq, NYSE and others.
Federal suit alleges misdealing and fraud by exchanges
According to the suit, exchanges that developed and sold HFT services, violated federal law. Exchanges offering those high priced services gave advantages to HFT. As a result, the advantages given to HFT by exchanges also barred and harmed investors. Consequently, that amounts to a manipulation of investors. According to the suit, that is illegal.
In addition, multiple other jurisdictions are contemplating legal actions. However, for our purposes one example is enough to make the point. The point being the substance of the legal argument against HFT. Without doubt, more lawyers and lawmakers are receiving calls and mulling legal responses to HFT. In that case, the numbers could grow.
In addition, several lawmakers have explored the issue. There is some talk of proposed laws. However, so far there is little but talk. Proponents of any such new law have a huge challenge to get both lawmakers and public support for the issue.
Understanding HFT is a complex challenge to nail down. It is far from black and white. Few politicians have any interest. Few investors understand it well and fewer members of the public know or care. Being realistic means expecting little to come of talk of legal actions.
In my expectation, lawyers will keep busy for years with little to show for it. I believe they will deliver little in the way of market changing effects.
Tax possibilities raised when markets technology and laws respond
That brings us to the taxing ideas. Lawmakers in several jurisdictions have expressed interest in taxing HFT. So far there has been no widespread understanding or support. Few lawmakers, happy to accept generous campaign funding, have motivation.
The case for financial transaction tax
But, to cover and understand the issue of proposing a HFT tax, we should discuss the basis of tax on trading. Most versions of proposals to tax HFT involve a Financial Transaction tax (FTT).
FTT means taxing each trade at a very low tax rate. The amount of any such tax would slide a small thin shave based on the transaction amount. Doing so would or could quickly more than wipe out the thin profit margins of most HFT. Most HFT trades produce less than one basis point profit. It takes 100 basis points to make 1%!
Backers of FTT say it produces revenue while cutting down stock market speculation. Some fans of FTT suggest it increases economic efficiency. Tax supporters also claim it dampens increased volatility. It does so by stopping unnecessary HFT while raising revenue. Most FTT advocates see HFT as an evil to be fought with this revenue tax grab. Imagine! A tax doing good for investors!
I am certainly not convinced a tax that stops HFT would do the deed and go then away. Rather, it likely would move in for a good long stay which would change markets. For investors that could certainly turn into an unwelcome unintended consequence.
Others argue that a FTT offers a way to stop HFT from rigging, market manipulation and investor abuse. They say bringing HFT under control would cut speculation, profiteering and stabilize stock markets. There are just as many opinions with opposing views. Who knew a tax could be so good or so bad!
Financial Transaction Taxes in many markets
There are considerable amounts of academic research and economic opinions around FTT. Such a tax is not new territory as it has been done before. For example, FTT exist in Australia, Belgium, France, Italy, South Korea, Switzerland and the UK.
One result of that tax action is those same markets are not HFT hotbeds. If may be a challenge to tie cause to effect but it certainly could be that the FTT be the reason. That makes on one think that U.S. and Canadian markets could benefit. However, I do not see a FTT happening any time soon in North American. For most North American politicians, HFT remains an obscure issue.
Still, FTT tax proposals keep coming but seem to get little public interest or support. How would FTT play out for North American markets? Opinions are many, facts are few, so I don’t know!
As far as I am concerned, arguing tax policy does nothing to advance our understanding of HFT. So we have made the points, first, FTT exists in several jurisdictions. Second, North American FTT proposals have all come to nothing, at least so far.
Tax proposals prompt perpetrator howls
Any North American FTT proposal generates a chorus of protesting howls. The groans come from the HFT wizards, their industry partners and a herd of paid apologists. Their voice is the industry association, Securities Industry and Financial Markets Association (SIFMA) who leads the chorus of complaints.
The SIFMA song runs:
“...is strongly opposed to the imposition of a sales tax on investors.”
Anyone believing this group or anyone associated with HFT, works for investor interests, believes in Santa. Still, few anywhere volunteer to pay more tax. And no surprise, the only tax SIFMA favors is the one getting put in HFT pockets.
Costs that HFT now impose across markets is like a tax that goes into the pockets of HFT wizards. Understandably they see that as good. However, that skim would be gone with any FTT.
A FTT would take that skim and put it in the public pocket. Naturally, according to HFT and their supporters, that would be bad. SIFMA also warns a FTT would reduce liquidity and impair market strength.
It remains unexplained why HFT costs imposed across markets avoids having the same impact this bunch complains about. Amazing that the effects of a cost they impose is not a problem. However any tax for the public purse is bad! Hmm...could anything be wrong with this picture? Perhaps these HFT warnings should be added to the many HFT misinformation myths prevously covered in Lesson 11?
Tax proposals, problems and regulation
The legal, regulatory and industry insider protective wall that shelters HFT, has more cracks. Those cracks are denied by the gang protecting HFT. That bunch correctly views any FTT or regulation proposal as a threat. They are not concerned about investors or even markets but are very concerned about any threat or risk to the scheme producing a lucrative stream of HFT profits.
Virtually any FTT would end the HFT skim of tiny profit made in millions of transactions. In contrast, regulation could be challenging and expensive. But a tax would be simple.
Any proposed action would receive the normal HFT response. Lawsuits! These guys love keeping lawyers busy. And billions generated by the scheme make sure their revenue flow can fund unlimited legal actions.
Any large HFT industry response could keep law schools busy producing eager lawyers! Legions of legal beagles would respond to fight any significant regulatory change! The mind boggles!
SEC securities transfer tax
Anti-tax arguments takes a hit when considering how the SEC get funded. That happens from a securities transfer tax without a problem. As the U.S. now funds the SEC that way, an FTT could be mad as a simple addition on the transfer.
As a result, presto, we have a simple adjustment to quickly produce a real time FTT system! Also worth considering, financial services as an industry, has an outstanding history of accurate record keeping. And that all gets done in real time with huge data feeds.
By taking advantage of the existing system, a FTT could be easy to administer and audit. As a regulated service by regulated parties, adding this requirement would be easy. It would have no significant bureaucracy or infrastructure needs!
Easy tax collection all but in place
Costs and complications of collecting a FTT get offered as further objections. Suggesting FTT creates the need for new bureaucracy or infrastructure are red herrings. Just use the working system that is now in place.
The existing system works just fine. So adding a FTT function would be a low cost item. To make a FTT happen could become a clearinghouse process addition. That could be accomplished by adding a tax collection function.
The clearinghouse tracks every buy and sell transaction. That means tax collection is all but in place. Adding FTT collection would be easy. That could produce a low cost, easy to administer, well tracked system.
Regulators do have many other possibiliteis to control HFT
Three obvious examples follow:
1.
End HFT rebate plans across exchanges by stopping order flow payments.
2.
Prohibit HFT related firms owning exchanges like BATS and Direct Edge.
3.
Bar the use of Hide not slide and HFT orders investors can not see or use.
That last one, special HFT orders, means they adjust prices while remaining in the order queue. In our case, your and my orders can not do that. If we want to make a price adjustment, we can. But we go to the back of the line. All investors do.
But not HFT, they go real-time adjustment and remain in front of our orders. No real investor even sees these hide not slide orders. And we do not have the privilege of placing any such orders. Clearly, this is not a level playing field.
Yet another example, regulations could address how HFT takes advantage of latency. But imagine how. And consider this, HFT profits by using a few microseconds to beat investors to a trade. Every time.
In response, one proposal calls for a SEC regulation imposing a microsecond uptick rule. Such a rule would require offers to stay open for 50 microseconds. If done, that could end the latency advantage of HFT.
But that would also put the market down a technology rabbit hole. As a result, markets would become further embedded in a world of technical measures and countermeasures. Such a world would move ever further away from average investors.
Once the SEC let HFT become entrenched in markets, they have in effect drunk the kool-aid. Now, they are part of the problem. And to address that, they must acknowledge at least part of the problem is their taking no action.
As the SEC allowed HFT to happen, any fight to reverse the tide will fill libraries with legal actions. At the same time the actions will also fill the pockets of lawyers. At the same time, regulators going anywhere near HFT revenue and profits will be met with ugly opposition. For the most part, making changes to counter such entrenched forces is going to take some time. In my expectation, office towers full of lawyers we keep busy in this for a long time.
Regulators win on a spoofing penalty as markets technology and laws respond to high frequency trading
The SEC actually recorded a rare regulatory win! Tower Research Capital, a HFT firm, agreed to pay $67.4 million in a spoofing case. That rare case was brought by the Justice Department and the Commodity Futures Trading Commission.
In the settlement of that case, the penalty is part of a deferred prosecution deal. That settlement deal covers some 2012 and 2013 actions. Those actions happened over some 6 years before the settlement agreement.
Even considering settlement of this bogus order case, few enforcement actions interfere with HFT activity. In fact, any hint of action brings obstructive resistance. That obstructive resistance come from the HFT firms and their allies. For example, HFT firms even take aggressive action against proposed research into HFT. Understandably, they have no interest in tolerating research that could document the market tilting and investor abuse of HFT. In any event, HFT fights every step of the way.
SEC proposed review of trading rules meets HFT resistance
A HFT review preview gave the SEC and anyone paying attention, a look at how HFT responds to getting a close review. It happened at the end of 2018. Then the SEC proposed to test the effects of incentive schemes.
In response, HFT and friends launched lawsuits against the SEC. That review was an attempt to examine incentive schemes in wide use by U.S. exchanges. Those rebates also tie in the NMS rules.
For example, SEC immediately met stout legal resistance proposing to research stock market trading incentives and costs. They cited that the system had become expensive as both data and trading costs escalated. As such review was a threat to HFT profits so was opposed. Tilted or rigged markets, fair trading, transparency or investor abuse were of no concern.
The SEC proposed examining the costs of both data and trading. In effect, it proposed a review of investors, brokers, exchanges and HFT money-making schemes. The intention of the SEC was to give Reg NMS a good review. The goals were to first, document if NMS works as intended and second, discover ways to make NMS better.
In brief, NMS rules increased market complexity and division. That was the result of being blind to reality. Remember, NMS rules did not consider how technology changed markets.
Business practice, technology and time are factors in play that NMS does not consider. In a nanosecond world it gets very complex, very fast! Exchange themselves evolved beyond the traditional coop or utility like structure. They became for profit business happy to invent services and charge premiums. As covered in the early lessons on this course, data premiums rapidly evolved.
SEC knows that trading rules, the passage of time and technology are all changing factors. For example, there are new exchange developments, dark pools and insider dealings to review. In response, expect HFT to do what they always do. And that is obstruct in every possible way and launch lawsuits.
Those strategies keep the HFT gravy train going while pushing off any action that could bring their party to an end. It seems natural for the HFT gang to call any SEC action a conflict of interest.
For background on Reg NMS, incentive schemes and rebate programs are discussed in Lesson 8.
Now we see exchanges emerging to serve interests enabled by changing technology. As an example, the new exchange MEMX Members Exchange. Established to skirt high data costs on established exchanges.
In such an evolving environment the SEC struggles to keep up let alone be ahead of such change. Passage of time, technology changes, new exchanges, dark pools, insider dealings. They are behind what is going on. More interesting times are ahead!
Grassroots petitions, appeals and whines offer little hope
There are grassroots movements against HFT investor abuse. But as markets, technology and laws respond, individual small investors have little impact. From time to time various people propose doing something about HFT abuse. And while they are well meaning individuals, politicians or organizations, I expect little to come from it.
Should you get involved? I say don’t bother. The regulator cavalry will cheer you on but never show up for the fight. You are on your own. Save yourself from the drama and time burn.
Time and energy burned produces no return or any possible positive outcome. Rather, spend it on researching productive investments for your future. That will produce a lifetime of returns.
That far better and more profitable use of your time will pay off for you. Doing that offers both more rewards and greater satisfaction. I write these words as someone with years of experience. That includes involvement with security commissions, politicians, stock market regulators and compliance officers. I urge you to make better use of your time.
After more than a decade of HFT activity, only the IEX Group got their analysis right. After doing the research they concluded that only market forces could deal with HFT. That was the only practical way to bring about real change to HFT activity.
Lawmakers and regulators that matter are going to do little or nothing about HFT. Only market forces can and will produce significant change. After the application of market forces, change will happen.
Once the issue passes we will see politicians and regulators show up. At that time, they will finally show up, take a bow and declare their contribution essential. Then we can all go home. But until then, use the strategy from the next lesson to deal with HFT.
Now You Know:
Markets technology and laws respond to high frequency trading
You know that a broad range of reactions to HFT are underway as noted in the lesson, Markets, technology and laws respond to high frequency trading. Those reactions range from doing nothing to proposals to reordering exchange regulations. Therefore, it is possible a future response may have more or less affect on your trading and investment results. That means, investors need to be aware of these possibilities. The lesson gives you a good look at the range of responses to HFT market rigging. Knowing and understanding how these responses help you grow as an investor. Knowledge of the potential changes prepares you for the investing future., shares superior investor knowledge. This lesson is from the Ultimate Guide To Stock Market Investing Success by White Top Investor.
You also know the answer to the question: How have markets responded to high frequency trading?
HFT affects the money of investors which has stimulated a range of responses. Those high frequency trading responses vary as most do nothing, but markets, technology and some laws have replied. Responses have ranged from trading speed bumps, taxes and even an entirely new exchange. Other responses include or propose laws and legal actions as a reply to HFT rigging. Some jurisdiction have the potential to grow into significant actions. These happen as more investors, regulators and legal minds are now paying attention to HFT. Most noteworthy is a new stock exchange established to remove the HFT advantages. By barring the HFT inside advantages, it offers a structural fix that depends on market forces.
The situation is dynamic and will likely show further significant change One result of such changes made or considered, could affect your trading and investment results. By knowing and understanding the responses to HFT, you become a better investor. And that makes you better prepared for the investing future. Details and discussion follow in the lesson, Markets, technology and laws respond to high frequency trading.
In addition you have these takeaways from: Markets technology and laws respond to high frequency trading:
Markets technology and laws respond to high frequency trading (HFT) exploitation. That investor abuse by HFT attracted a range of responses from a new exchange to doing nothing. Proposals to counter HFT included technology speed bumps, taxes and regulations. Although regulators continue to talk, in most cases proposals are only words. That means no market, trading or investing fixes will address markets rigged for HFT. Time will tell if lawmakers and regulators change to address HFT. Meanwhile, HFT advantages over investors continue. That means addressing HFT abuse is up to individual investors.
IEX Exchange Innovations include the following:
Other exchanges begin reacting and responding to HFT
Legal challenges to HFT are mounting
Multiple jurisdictions are proposing a HFT tax or FTT
Regulators including the SEC continue to trail behind while talking of responding to HFT
You may like lessons related to: Markets technology and laws respond to high frequency trading
Learn how to begin building your investor mind here: The Investor Mind.
Mortal investors see immortal debt
Optimism and unrealistic investor minds
FED begins Quantitative Tightening
Investing factors time and knowledge
Comment or ask questions on:
Markets technology and laws respond to high frequency trading
You can email me at [email protected].
And subscribe for free to get White Top Investor lessons in your inbox!
Make money work for you by knowing how investors think, feel and act. Begin building your investor mind here: The Investor Mind.
White Top Investor lessons, website layout and organization: click here.
Make money work for you
The lesson, Lesson name, shares superior investor knowledge. That knowledge helps you become a more comfortable and confident investor. And you can use White Top Investor lessons to learn investing at your own pace. By learning one step at a time you can master your financial security and independence. And White top Investor never sells or shares our email list. Click to Learn more.
High frequency trading explained, lesson links:
Introducing high frequency trading explained Lesson 1
Racing for profits drives high frequency trading Lesson 2
Markets and technology built HFT Lesson 3
Technology powers high frequency trading Lesson 4
High frequency trading secrets exposed! Lesson 5
Laws and ethics beat investors Lesson 6
Market management burns investors Lesson 7
High frequency trader 3-Way ambush Lesson 8
Fair and foul high frequency trading Lesson 9
High frequency trading strategies, risks and regulations Lesson 10
Misinformation myths of high frequency trading Lesson 11
Markets technology and laws respond to high frequency trading Lesson 12
Investors deal with high frequency trading Lesson 13
FAQ about high frequency trading
Next lesson, course 510 lesson 13: Investors deal with high frequency trading
Let’s connect, follow me; Twitter LinkedIn Facebook
Share:
Markets technology and laws respond to high frequency trading
Buttons below let you share this lesson with family and friends!
Now, it’s your turn! Apply the lesson: Markets technology and laws respond to high frequency trading
Begin applying your new knowledge at your own pace. Taking the time you need to understand the lesson, helps you master the material. Then you can apply what you learned to take another step in your development as a superior investor. Have a prosperous day!
Image courtesy: Unsplash.com
Copyright © 2013-24 Bryan Kelly
WhiteTopInvestor.com
