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The right response to HFT

Kudos to Sen. Edward Kaufman for asking securities regulators to take a comprehensive look at the impact of high-frequency trading and related super-fast trading strategies on the markets.

The Delaware senator is taking the right approach in asking the Securities and Exchange Commission to conduct a broad review of HFT, so-called flash orders and dark pools. It’s a much better approach than the more narrow one taken by Sen. Chuck Schumer, who last month focused solely on the impact of flash orders on the market.

While the issue of flash orders is important–it’s pretty clear that most HFT traders are not getting an early sneak peak at the order flow coming into regulated exchanges. But Schumer was quick to zero in on flash orders simply because that’s what a story in The New York Times mainly focused on.

Unfortunately, Schumer’s own letter to the SEC put too much focus on flash orders and made it sound like that was what HFT is all about. Kaufman, however, is helping to recalibrate the debate about HFT with his own letter to SEC Chairman Mary Schapiro.

Dear shareholder…it’s high-frequency trading

A few months ago, not many outside of the quant world were talking about high-frequency trading. But these days every one is talking about all the profits a select group of Wall Street firms and hedge funds area making from super-fast, entirely automated algorithmic trading.

So may be it’s not too surprising that some money managers are beginning to attribute some of the post-March surge in the stock market to the impact of HFT. Or that’s how money managers Steve Scruggs and Benton Bragg, see it in this recent letter to shareholders of several funds they manage:

Judge Rakoff’s People’s Court

Judge Jed Rakoff’s courtroom at the federal district court in Manhattan will turn into a people’s court of sorts as he looks to get to the bottom of the paltry $33 million Bank of America settlement with the SEC, which was looking into whether the bank misled shareholders about bonuses paid to Merrill Lynch employees.

The settlement amount is peanuts next to the $5.8 billion in authorized Merrill bonuses and the billions the government injected into the bank to keep it afloat.

Algos gone wild

The many proponents of high-frequency trading keep saying there’s no reason to be concerned about a rogue algorithim sparking a 1987 market-style crash. HFT supporters keep saying show us a case where a rogue algo even caused a minor hiccup in the market.

Well, Bernard Donefer, a professor at CUNY’s Baruch College in New York City and a critic of highly-automated trading programs, says the world already has gotten a glimpse at the kind of mayhem a rogue or simply a misfiring algo can cause.

Wall Street meets The Matrix

Michael Durbin is no Wall Street rebel. But Durbin, who has been on the front lines of
high-frequency trading (HFT) since its early days, isn’t afraid to buck the industry line that lightning-fast trading of stock, options and commodities poses little or no risk to the stability of the markets.

Durbin says it’s reasonable to wonder whether Wall Street’s unfettered embrace of algorithmic automated trading could be setting the stage for a future meltdown.

Mary Schapiro is no money manager

Let’s hope Securities and Exchange Commission Chairman Mary Schapiro is a better regulator than a money manager.

That’s because The Financial Industry Regulatory Authority, the last place Schapiro ran, lost $696 million last year. Almost all of FINRA’s red ink stemmed from losses on investments, including ownership stakes in hedge funds and private equity firms, stocks and bonds.

Goldman fires back on HFT

Goldman Sachs is not known for being particularly forth coming with the press. The investment firm’s two favorite words for dealing with media inquiries are “no comment.”

But all of sudden Goldman is taking an aggressive stance when it comes to the subject of rapid-fire high frequency stock and commodities trading–an activity that is drawing increasing scrutiny from the press, regulators and even the folks on Capitol Hill.

Schumer aka Flash Gordon

There’s an old joke in New York that the most dangerous place is the space between a TV camera and Sen. Chuck Schumer. And the New York Democrat’s love of the limelight certainly was on display late last week with regards to the increasingly controversial subject of high frequency trading.

Schumer’s staff didn’t waste time on Friday in announcing that the senator had sent a letter to the Securities and Exchange Commission, asking regulators to study some aspects of highly-automated stock and commodity trading.

Was SEC slow to probe NIR Group?

The Securities and Exchange Commission is joining the hunt into just what is going on at NIR Group, a Roslyn, NY small-cap focused hedge fund run by Corey Ribotsky.

The Wall Street Journal reports today that the SEC has sent a subpoena to NIR, seeking information about the stellar returns Ribotsky had reported to investors throughout much of 2008. It appears the SEC wants to know why Ribotsky suddenly froze redemptions in his fund last October, in the wake of Lehman’s demise, if the fund had been doing so well.

SEC is still fumbling the ball

Maybe someday the Securities and Exchange Commission will figure out what to do when it gets a credible tip about potential wrongdoing. But judging by the agency’s handling of a recent investor complaint, the nation’s top securities cop has a long way to go.

This tale begins in March, when an investor in Britain sent an email to Bill Singer, a New York securities lawyer, complaining about a cold call he had received from someone purporting to be from a brokerage firm in Peoria, Illinois, calling itself AJ Witherspoon & Co. The call was an effort to interest him in a transaction involving shares in a company called SecureTee International.

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