High-Frequency Trading: Enforcement Trends Emerge

High-Frequency Trading (HFT) remains one of the most hotly debated subjects in the securities industry, perhaps accelerated by Michael Lewis’s 2014 best-selling book “Flash Boys,” which profiled some of the players involved in HFT.¹ As is often the case, Congress has now joined the debate; Sen. Carl Levin scheduled a hearing on HFT before the Permanent Subcommittee on Investigations (PSI).² The role of law enforcement in HFT is prominent on the list of debated issues. In a letter to the PSI, Mary Jo White, Chair of the U.S. Securities and Exchange Commission, emphasized the difficulty of assessing HFT’s impact on capital markets because of “limitations on available data.”³ Until recently, law enforcement in the HFT space has been spotty and without any apparent pattern, which may be the result of an uncertainty about the proper role of enforcement and the difficulty, hinted at in Chair White’s letter, of devising a targeted HFT enforcement program. But patterns are beginning to appear.

A review of recent actions related to HFT confirms the uncertainty of the role of law enforcement, but also suggests an emerging trend. On the one hand, many of the enforcement actions have centered on “spoofing” and similar stock manipulation schemes. But, in these cases, the manipulative scheme itself is not new at all; it is only being carried out with the assistance of the latest technological devices. For that reason, it is questionable whether these cases genuinely relate to HFT and therefore whether they are relevant to the debate surrounding its proper role in market structure and access. On the other hand, although some of the actions against trading platforms also reflect uncertainty about enforcement priorities, some trends have begun to emerge in the areas of disclosure and equitable treatment of market participants. The New York Attorney General’s (NYAG) suit against Barclays Capital⁴ fits this profile, but also presents novel theories about trading platform liability under New York’s broad anti-fraud law, the Martin Act.⁵ In the coming year, we will see how the law is developed in these existing cases and whether new enforcement actions continue to follow the recent trend or whether additional areas of focus emerge.

Traders