High-frequency trading

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High-frequency trading (HFT) is a type of algorithmic financial trading characterized

by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-
frequency financial data and electronic trading tools. [1] While there is no single definition
of HFT, among its key attributes are highly sophisticated algorithms, co-location, and
very short-term investment horizons.[2] HFT can be viewed as a primary form
of algorithmic trading in finance.[3][4] Specifically, it is the use of sophisticated
technological tools and computer algorithms to rapidly trade securities.[5][6][7] HFT uses
proprietary trading strategies carried out by computers to move in and out of positions in
seconds or fractions of a second.[8]
 In 2017, Aldridge and Krawciw[9] estimated that in 2016 HFT on average initiated 10–
40% of trading volume in equities, and 10–15% of volume in foreign exchange and
commodities. Intraday, however, proportion of HFT may vary from 0% to 100% of short-
term trading volume. Previous estimates reporting that HFT accounted for 60–73% of all
US equity trading volume, with that number falling to approximately 50% in 2012 were
highly inaccurate speculative guesses.[10][11] High-frequency traders move in and out of
short-term positions at high volumes and high speeds aiming to capture sometimes a
fraction of a cent in profit on every trade.[6] HFT firms do not consume significant
amounts of capital, accumulate positions or hold their portfolios overnight. [12] As a result,
HFT has a potential Sharpe ratio (a measure of reward to risk) tens of times higher than
traditional buy-and-hold strategies.[13] High-frequency traders typically compete against
other HFTs, rather than long-term investors.[12][14][15] HFT firms make up the low margins
with incredibly high volumes of trades, frequently numbering in the millions.
A substantial body of research argues that HFT and electronic trading pose new types
of challenges to the financial system. [5][16] Algorithmic and high-frequency traders were
both found to have contributed to volatility in the Flash Crash of May 6, 2010, when
high-frequency liquidity providers rapidly withdrew from the market. [5][15][16][17][18] Several
European countries have proposed curtailing or banning HFT due to concerns about
volatility.[19]

Contents

 1History
o 1.1Market growth
o 1.2Market share
 2Strategies
o 2.1Market making
o 2.2Quote stuffing
o 2.3Ticker tape trading
o 2.4Event arbitrage
o 2.5Statistical arbitrage
o 2.6Index arbitrage
o 2.7News-based trading
o 2.8Low-latency strategies
o 2.9Order properties strategies
 3Effects
o 3.1May 6, 2010 Flash Crash
 4Granularity and accuracy
 5Risks and controversy
o 5.1Flash trading
o 5.2Insider trading
 6Violations and fines
o 6.1Regulation and enforcement
o 6.2Order types
o 6.3Quote stuffing
 o 6.4Spoofing and layering
o 6.5Market manipulation
 7Advanced trading platforms
 8See also
 9References
 10External links

History[edit]
High-frequency trading has taken place at least since the 1930s, mostly in the form of
specialists and pit traders buying and selling positions at the physical location of the
exchange, with high-speed telegraph service to other exchanges. [20]
The rapid-fire computer-based HFT developed gradually since 1983 after NASDAQ
introduced a purely electronic form of trading. [21] At the turn of the 21st century, HFT
trades had an execution time of several seconds, whereas by 2010 this had decreased
to milli- and even microseconds.[22] Until recently, high-frequency trading was a little-
known topic outside the financial sector, with an article published by the New York
Times in July 2009 being one of the first to bring the subject to the public's attention. [23]
On September 2, 2013, Italy became the world's first country to introduce a tax
specifically targeted at HFT, charging a levy of 0.02% on equity transactions lasting less
than 0.5 seconds.[24][25]
Market growth[edit]
In the early 2000s, high-frequency trading still accounted for fewer than 10% of equity
orders, but this proportion was soon to begin rapid growth. According to data from the
NYSE, trading volume grew by about 164% between 2005 and 2009 for which high-
frequency trading might be accounted.[23] As of the first quarter in 2009, total assets
under management for hedge funds with high-frequency trading strategies were
$141 billion, down about 21% from their peak before the worst of the crises,[26] although
most of the largest HFTs are actually LLCs owned by a small number of investors. The
high-frequency strategy was first made popular by Renaissance Technologies[27] who
use both HFT and quantitative aspects in their trading. Many high-frequency firms
are market makers and provide liquidity to the market which lowers volatility and helps
narrow bid-offer spreads, making trading and investing cheaper for other market
participants.[26]
Market share[edit]
In the United States in 2009, high-frequency trading firms represented 2% of the
approximately 20,000 firms operating today, but accounted for 73% of all equity orders
volume.[citation needed][28] The major U.S. high-frequency trading firms include Virtu
Financial, Tower Research Capital, IMC, Tradebot and Citadel LLC.[29] The Bank of
England estimates similar percentages for the 2010 US market share, also suggesting
that in Europe HFT accounts for about 40% of equity orders volume and for Asia about
5–10%, with potential for rapid growth. [22] By value, HFT was estimated in 2010 by
consultancy Tabb Group to make up 56% of equity trades in the US and 38% in Europe.
[30]
As HFT strategies become more widely used, it can be more difficult to deploy them
profitably. According to an estimate from Frederi Viens of Purdue University, profits from
HFT in the U.S. has been declining from an estimated peak of $5bn in 2009, to about
$1.25bn in 2012.[31]
Though the percentage of volume attributed to HFT has fallen in the equity markets, it
has remained prevalent in the futures markets. According to a study in 2010 by Aite
Group, about a quarter of major global futures volume came from professional high-
frequency traders.[28] In 2012, according to a study by the TABB Group, HFT accounted
for more than 60 percent of all futures market volume in 2012 on U.S. exchanges. [32]

Strategies[edit]
High-frequency trading is quantitative trading that is characterized by short portfolio
holding periods.[33] All portfolio-allocation decisions are made by computerized
quantitative models. The success of high-frequency trading strategies is largely driven
by their ability to simultaneously process large volumes of information, something
ordinary human traders cannot do. Specific algorithms are closely guarded by their
owners. Many practical algorithms are in fact quite simple arbitrages which could
previously have been performed at lower frequency—competition tends to occur
through who can execute them the fastest rather than who can create new
breakthrough algorithms.
The common types of high-frequency trading include several types of market-making,
event arbitrage, statistical arbitrage, and latency arbitrage. Most high-frequency trading
strategies are not fraudulent, but instead exploit minute deviations from market
equilibrium.[33]
Market making[edit]
Main article: Market maker

According to SEC:[34]
A "market maker" is a firm that stands ready to buy and sell a particular stock on a
regular and continuous basis at a publicly quoted price. You'll most often hear about
market makers in the context of the Nasdaq or other "over the counter" (OTC) markets.
Market makers that stand ready to buy and sell stocks listed on an exchange, such as
the New York Stock Exchange, are called "third market makers". Many OTC stocks
have more than one market-maker. Market-makers generally must be ready to buy and
sell at least 100 shares of a stock they make a market in. As a result, a large order from
an investor may have to be filled by a number of market-makers at potentially different
prices.
There can be a significant overlap between a "market maker" and "HFT firm". HFT firms
characterize their business as "Market making" – a set of high-frequency trading
strategies that involve placing a limit order to sell (or offer) or a buy limit order (or bid) in
order to earn the bid-ask spread. By doing so, market makers provide counterpart to
incoming market orders. Although the role of market maker was traditionally fulfilled by
specialist firms, this class of strategy is now implemented by a large range of investors,
thanks to wide adoption of direct market access. As pointed out by empirical studies,
[35]
 this renewed competition among liquidity providers causes reduced effective market
spreads, and therefore reduced indirect costs for final investors." A crucial distinction is
that true market makers don't exit the market at their discretion and are committed not
to, where HFT firms are under no similar commitment.
Some high-frequency trading firms use market making as their primary strategy.
[12]
 Automated Trading Desk (ATD), which was bought by Citigroup in July 2007, has
been an active market maker, accounting for about 6% of total volume on both the
NASDAQ and the New York Stock Exchange.[36] In May 2016, Citadel LLC bought assets
of ATD from Citigroup. Building up market making strategies typically involves precise
modeling of the target market microstructure[37][38] together with stochastic
control techniques.[39][40][41][42]
These strategies appear intimately related to the entry of new electronic venues.
Academic study of Chi-X's entry into the European equity market reveals that its launch
coincided with a large HFT that made markets using both the incumbent market, NYSE-
Euronext, and the new market, Chi-X. The study shows that the new market provided
ideal conditions for HFT market-making, low fees (i.e., rebates for quotes that led to
execution) and a fast system, yet the HFT was equally active in the incumbent market to
offload nonzero positions. New market entry and HFT arrival are further shown to
coincide with a significant improvement in liquidity supply. [43]
Quote stuffing[edit]
Further information: Quote stuffing

Quote stuffing is a form of abusive market manipulation that has been employed by
high-frequency traders (HFT) and is subject to disciplinary action. It involves quickly
entering and withdrawing a large number of orders in an attempt to flood the market
creating confusion in the market and trading opportunities for high-frequency traders. [44]
 
[45] [46]

Ticker tape trading[edit]

For other uses, see Ticker tape (disambiguation).

Much information happens to be unwittingly embedded in market data, such as quotes

and volumes. By observing a flow of quotes, computers are capable of extracting
information that has not yet crossed the news screens. Since all quote and volume
information is public, such strategies are fully compliant with all the applicable laws.
Filter trading is one of the more primitive high-frequency trading strategies that involves
monitoring large amounts of stocks for significant or unusual price changes or volume
activity. This includes trading on announcements, news, or other event criteria. Software
would then generate a buy or sell order depending on the nature of the event being
looked for.[47]
Tick trading often aims to recognize the beginnings of large orders being placed in the
market. For example, a large order from a pension fund to buy will take place over
several hours or even days, and will cause a rise in price due to increased demand. An
arbitrageur can try to spot this happening then buy up the security, then profit from
selling back to the pension fund. This strategy has become more difficult since the
introduction of dedicated trade execution companies in the 2000s [citation needed] which provide
optimal[citation needed] trading for pension and other funds, specifically designed to remove [citation
needed]
 the arbitrage opportunity.
Event arbitrage[edit]
Certain recurring events generate predictable short-term responses in a selected set of
securities.[48] High-frequency traders take advantage of such predictability to generate
short-term profits.[49]
Statistical arbitrage[edit]
Another set of high-frequency trading strategies are strategies that exploit predictable
temporary deviations from stable statistical relationships among securities. Statistical
arbitrage at high frequencies is actively used in all liquid securities, including equities,
bonds, futures, foreign exchange, etc. Such strategies may also involve classical
arbitrage strategies, such as covered interest rate parity in the foreign exchange market,
which gives a relationship between the prices of a domestic bond, a bond denominated
in a foreign currency, the spot price of the currency, and the price of a forward
contract on the currency. High-frequency trading allows similar arbitrages using models
of greater complexity involving many more than four securities.
The TABB Group estimates that annual aggregate profits of high-frequency arbitrage
strategies exceeded US$21 billion in 2009,[10] although the Purdue study estimates the
profits for all high frequency trading were US$5 billion in 2009.[31]
Index arbitrage[edit]
Index arbitrage exploits index tracker funds which are bound to buy and sell large
volumes of securities in proportion to their changing weights in indices. If a HFT firm is
able to access and process information which predicts these changes before the tracker
funds do so, they can buy up securities in advance of the trackers and sell them on to
them at a profit.
News-based trading[edit]
Company news in electronic text format is available from many sources including
commercial providers like Bloomberg, public news websites, and Twitter feeds.
Automated systems can identify company names, keywords and sometimes semantics
to make news-based trades before human traders can process the news.
Low-latency strategies[edit]
A separate, "naïve" class of high-frequency trading strategies relies exclusively on ultra-
low latency direct market access technology. In these strategies, computer scientists
rely on speed to gain minuscule advantages in arbitraging price discrepancies in some
particular security trading simultaneously on disparate markets. [citation needed]
Another aspect of low latency strategy has been the switch from fiber
optic to microwave technology for long distance networking. Especially since 2011,
there has been a trend to use microwaves to transmit data across key connections such
as the one between New York City and Chicago. This is because microwaves travelling
in air suffer a less than 1% speed reduction compared to light travelling in a vacuum,
whereas with conventional fiber optics light travels over 30% slower. [31]
Order properties strategies[edit]
High-frequency trading strategies may use properties derived from market data feeds to
identify orders that are posted at sub-optimal prices. Such orders may offer a profit to
their counterparties that high-frequency traders can try to obtain. Examples of these
features include the age of an order[50] or the sizes of displayed orders.[51] Tracking
important order properties may also allow trading strategies to have a more accurate
prediction of the future price of a security.

Effects[edit]
The effects of algorithmic and high-frequency trading are the subject of ongoing
research. High frequency trading causes regulatory concerns as a contributor to market
fragility.[52] Regulators claim these practices contributed to volatility in the May 6, 2010
Flash Crash[58] and find that risk controls are much less stringent for faster trades. [16]
Members of the financial industry generally claim high-frequency trading substantially
improves market liquidity,[12] narrows bid-offer spread, lowers volatility and makes trading
and investing cheaper for other market participants. [61]
An academic study[35] found that, for large-cap stocks and in quiescent markets during
periods of "generally rising stock prices", high-frequency trading lowers the cost of
trading and increases the informativeness of quotes; [35]:31 however, it found "no significant
effects for smaller-cap stocks",[35]:3 and "it remains an open question whether algorithmic
trading and algorithmic liquidity supply are equally beneficial in more turbulent or
declining markets. ...algorithmic liquidity suppliers may simply turn off their machines
when markets spike downward."[35]:31
In September 2011, market data vendor Nanex LLC published a report stating the
contrary. They looked at the amount of quote traffic compared to the value of trade
transactions over 4 and half years and saw a 10-fold decrease in efficiency. [62] Nanex's
owner is an outspoken detractor of high-frequency trading. [63] Many discussions about
HFT focus solely on the frequency aspect of the algorithms and not on their decision-
making logic (which is typically kept secret by the companies that develop them). This
makes it difficult for observers to pre-identify market scenarios where HFT will dampen
or amplify price fluctuations. The growing quote traffic compared to trade value could
indicate that more firms are trying to profit from cross-market arbitrage techniques that
do not add significant value through increased liquidity when measured globally.
More fully automated markets such as NASDAQ, Direct Edge, and BATS, in the US,
gained market share from less automated markets such as the NYSE. Economies of
scale in electronic trading contributed to lowering commissions and trade processing
fees, and contributed to international mergers and consolidation of financial exchanges.
The speeds of computer connections, measured in milliseconds or microseconds, have
become important.[64][65] Competition is developing among exchanges for the fastest
processing times for completing trades. For example, in 2009 the London Stock
Exchange bought a technology firm called MillenniumIT and announced plans to
implement its Millennium Exchange platform[66] which they claim has an average latency
of 126 microseconds.[67] This allows sub-millisecond resolution timestamping of the order
book. Off-the-shelf software currently allows for nanoseconds resolution of timestamps
using a GPS clock with 100 nanoseconds precision.[68]
Spending on computers and software in the financial industry increased to $26.4 billion
in 2005.[69]
May 6, 2010 Flash Crash[edit]
Main article: 2010 Flash Crash

The brief but dramatic stock market crash of May 6, 2010 was initially thought to have
been caused by high-frequency trading. [70] The Dow Jones Industrial Average plunged to
its largest intraday point loss, but not percentage loss, [71] in history, only to recover much
of those losses within minutes.[72]
In the aftermath of the crash, several organizations argued that high-frequency trading
was not to blame, and may even have been a major factor in minimizing and partially
reversing the Flash Crash.[73] CME Group, a large futures exchange, stated that, insofar
as stock index futures traded on CME Group were concerned, its investigation had
found no support for the notion that high-frequency trading was related to the crash, and
actually stated it had a market stabilizing effect. [74]
However, after almost five months of investigations, the U.S. Securities and Exchange
Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a
joint report identifying the cause that set off the sequence of events leading to the Flash
Crash[75] and concluding that the actions of high-frequency trading firms contributed to
volatility during the crash.
The report found that the cause was a single sale of $4.1 billion in futures contracts by a
mutual fund, identified as Waddell & Reed Financial, in an aggressive attempt to hedge
its investment position.[76][77] The joint report also found that "high-frequency traders
quickly magnified the impact of the mutual fund's selling." [17] The joint report "portrayed a
market so fragmented and fragile that a single large trade could send stocks into a
sudden spiral", that a large mutual fund firm "chose to sell a big number of futures
contracts using a computer program that essentially ended up wiping out available
buyers in the market", that as a result high-frequency firms "were also aggressively
selling the E-mini contracts", contributing to rapid price declines. [17] The joint report also
noted "HFTs began to quickly buy and then resell contracts to each other – generating a
'hot-potato' volume effect as the same positions were passed rapidly back and
forth."[17] The combined sales by Waddell and high-frequency firms quickly drove "the E-
mini price down 3% in just four minutes".[17] As prices in the futures market fell, there was
a spillover into the equities markets where "the liquidity in the market evaporated
because the automated systems used by most firms to keep pace with the market
paused" and scaled back their trading or withdrew from the markets altogether. [17] The
joint report then noted that "Automatic computerized traders on the stock market shut
down as they detected the sharp rise in buying and selling." [54] As computerized high-
frequency traders exited the stock market, the resulting lack of liquidity "...caused
shares of some prominent companies like Procter & Gamble and Accenture to trade
down as low as a penny or as high as $100,000". [54] While some firms exited the market,
high-frequency firms that remained in the market exacerbated price declines because
they "'escalated their aggressive selling' during the downdraft". [15] In the years following
the flash crash, academic researchers and experts from the CFTC pointed to high-
frequency trading as just one component of the complex current U.S. market structure
that led to the events of May 6, 2010.[78]

Granularity and accuracy[edit]

In 2015 the Paris-based regulator of the 28-nation European Union, the European
Securities and Markets Authority, proposed time standards to span the EU, that would
more accurately synchronize trading clocks "to within a nanosecond, or one-billionth of
a second" to refine regulation of gateway-to-gateway latency time—"the speed at which
trading venues acknowledge an order after receiving a trade request". Using these more
detailed time-stamps, regulators would be better able to distinguish the order in which
trade requests are received and executed, to identify market abuse and prevent
potential manipulation of European securities markets by traders using advanced,
powerful, fast computers and networks. The fastest technologies give traders an
advantage over other "slower" investors as they can change prices of the securities they
trade.[79]

Risks and controversy[edit]

According to author Walter Mattli, the ability of regulators to enforce the rules has
greatly declined since 2005 with the passing of the Regulation National Market
System (Reg NMS) by the US Securities and Exchange Commission. As a result,
the NYSE's quasi monopoly role as a stock rule maker was undermined and turned the
stock exchange into one of many globally operating exchanges. The market then
became more fractured and granular, as did the regulatory bodies, and since stock
exchanges had turned into entities also seeking to maximize profits, the one with the
most lenient regulators were rewarded, and oversight over traders' activities was lost.
This fragmentation has greatly benefitted HFT.[80]
High-frequency trading comprises many different types of algorithms. [1] Various studies
reported that certain types of market-making high-frequency trading reduces volatility
and does not pose a systemic risk,[12][59][60][74] and lowers transaction costs for retail
investors,[15][35][59][60] without impacting long term investors.[6][12][60] Other studies, summarized
in Aldridge, Krawciw, 2017[81] find that high-frequency trading strategies known as
"aggressive" erode liquidity and cause volatility.
High-frequency trading has been the subject of intense public focus and debate since
the May 6, 2010 Flash Crash.[85] At least one Nobel Prize–winning economist, Michael
Spence, believes that HFT should be banned.[86] A working paper found "the presence of
high frequency trading has significantly mitigated the frequency and severity of end-of-
day price dislocation".[87]
In their joint report on the 2010 Flash Crash, the SEC and the CFTC stated that "market
makers and other liquidity providers widened their quote spreads, others reduced
offered liquidity, and a significant number withdrew completely from the
markets"[75] during the flash crash.
Politicians, regulators, scholars, journalists and market participants have all raised
concerns on both sides of the Atlantic.[30][84][88] This has led to discussion of whether high-
frequency market makers should be subject to various kinds of regulations.
In a September 22, 2010 speech, SEC chairperson Mary Schapiro signaled that US
authorities were considering the introduction of regulations targeted at HFT. She said,
"high frequency trading firms have a tremendous capacity to affect the stability and
integrity of the equity markets. Currently, however, high frequency trading firms are
subject to very little in the way of obligations either to protect that stability by promoting
reasonable price continuity in tough times, or to refrain from exacerbating price
volatility."[89] She proposed regulation that would require high-frequency traders to stay
active in volatile markets.[90] A later SEC chair Mary Jo White pushed back against
claims that high-frequency traders have an inherent benefit in the markets. [91] SEC
associate director Gregg Berman suggested that the current debate over HFT lacks
perspective. In an April 2014 speech, Berman argued: "It's much more than just the
automation of quotes and cancels, in spite of the seemingly exclusive fixation on this
topic by much of the media and various outspoken market pundits. (...) I worry that it
may be too narrowly focused and myopic."[92]
The Chicago Federal Reserve letter of October 2012, titled "How to keep markets safe
in an era of high-speed trading", reports on the results of a survey of several dozen
financial industry professionals including traders, brokers, and exchanges. [16] It found that

 risk controls were poorer in high-frequency trading, because of competitive time

pressure to execute trades without the more extensive safety checks normally used in
slower trades.
 "some firms do not have stringent processes for the development, testing, and
deployment of code used in their trading algorithms."
 "out-of control algorithms were more common than anticipated prior to the study and that
there were no clear patterns as to their cause."
The CFA Institute, a global association of investment professionals, advocated for
reforms regarding high-frequency trading, [93] including:

 Promoting robust internal risk management procedures and controls over

the algorithms and strategies employed by HFT firms.
 Trading venues should disclose their fee structure to all market participants.
 Regulators should address market manipulation and other threats to the integrity of
markets, regardless of the underlying mechanism, and not try to intervene in the trading
process or to restrict certain types of trading activities.
Flash trading[edit]
Exchanges offered a type of order called a "Flash" order (on NASDAQ, it was called
"Bolt" on the Bats stock exchange) that allowed an order to lock the market (post at the
same price as an order on the other side of the book [clarification needed]) for a small amount of
time (5 milliseconds). This order type was available to all participants but since HFT's
adapted to the changes in market structure more quickly than others, they were able to
use it to "jump the queue" and place their orders before other order types were allowed
to trade at the given price. Currently, the majority of exchanges do not offer flash
trading, or have discontinued it. By March 2011, the NASDAQ, BATS, and Direct Edge
exchanges had all ceased offering its Competition for Price Improvement functionality
(widely referred to as "flash technology/trading"). [94][95]
Insider trading[edit]
On September 24, 2013, the Federal Reserve revealed that some traders are under
investigation for possible news leak and insider trading. An anti-HFT firm called NANEX
claimed that right after the Federal Reserve announced its newest decision, trades were
registered in the Chicago futures market within two milliseconds. However, the news
was released to the public in Washington D.C. at exactly 2:00 pm calibrated by atomic
clock,[96] and takes 3.19 milliseconds to reach Chicago at the speed of light in straight
line and ca. 7 milliseconds in practice.[97] Most of the conspiracy revolved around using
inappropriate time stamps using times from the SIP (consolidated quote that is
necessarily slow) and the amount of "jitter" that can happen when looking at such
granular timings.[98]

Violations and fines[edit]

Regulation and enforcement[edit]
See also: Regulation of algorithms

In March 2012, regulators fined Octeg LLC, the equities market-making unit of high-
frequency trading firm Getco LLC, for $450,000. Octeg violated Nasdaq rules and failed
to maintain proper supervision over its stock trading activities. [99] The fine resulted from a
request by Nasdaq OMX for regulators to investigate the activity at Octeg LLC from the
day after the May 6, 2010 Flash Crash through the following December. Nasdaq
determined the Getco subsidiary lacked reasonable oversight of its algo-driven high-
frequency trading.[100]
In October 2013, regulators fined Knight Capital $12 million for the trading malfunction
that led to its collapse. Knight was found to have violated the SEC's market access rule,
in effect since 2010 to prevent such mistakes. Regulators stated the HFT firm ignored
dozens of error messages before its computers sent millions of unintended orders to the
market. Knight Capital eventually merged with Getco to form KCG Holdings. Knight lost
over $460 million from its trading errors in August 2012 that caused disturbance in the
U.S. stock market.[101]
In September 2014, HFT firm Latour Trading LLC agreed to pay a SEC penalty of
$16 million. Latour is a subsidiary of New York-based high-frequency trader Tower
Research Capital LLC. According to the SEC's order, for at least two years Latour
underestimated the amount of risk it was taking on with its trading activities. By using
faulty calculations, Latour managed to buy and sell stocks without holding enough
capital. At times, the Tower Research Capital subsidiary accounted for 9% of all U.S.
stock trading. The SEC noted the case is the largest penalty for a violation of the net
capital rule.[102]
In response to increased regulation, such as by FINRA,[103] some[104][105] have argued that
instead of promoting government intervention, it would be more efficient to focus on a
solution that mitigates information asymmetries among traders and their backers; others
argue that regulation does not go far enough. [106] In 2018, the European Union introduced
the MiFID II/MiFIR regulation.[107]
Order types[edit]
On January 12, 2015, the SEC announced a $14 million penalty against a subsidiary
of BATS Global Markets, an exchange operator that was founded by high-frequency
traders. The BATS subsidiary Direct Edge failed to properly disclose order types on its
two exchanges EDGA and EDGX. These exchanges offered three variations of
controversial "Hide Not Slide"[108] orders and failed to accurately describe their priority to
other orders. The SEC found the exchanges disclosed complete and accurate
information about the order types "only to some members, including certain high-
frequency trading firms that provided input about how the orders would operate". [109] The
complaint was made in 2011 by Haim Bodek.[108]
Reported in January 2015, UBS agreed to pay $14.4 million to settle charges of not
disclosing an order type that allowed high-frequency traders to jump ahead of other
participants. The SEC stated that UBS failed to properly disclose to all subscribers of its
dark pool "the existence of an order type that it pitched almost exclusively to market
makers and high-frequency trading firms". UBS broke the law by accepting and ranking
hundreds of millions of orders[110] priced in increments of less than one cent, which is
prohibited under Regulation NMS. The order type called PrimaryPegPlus enabled HFT
firms "to place sub-penny-priced orders that jumped ahead of other orders submitted at
legal, whole-penny prices".[111]
Quote stuffing[edit]
Main article: Quote stuffing

In June 2014, high-frequency trading firm Citadel LLC was fined $800,000 for violations
that included quote stuffing. Nasdaq's disciplinary action stated that Citadel "failed to
prevent the strategy from sending millions of orders to the exchanges with few or no
executions". It was pointed out that Citadel "sent multiple, periodic bursts of order
messages, at 10,000 orders per second, to the exchanges. This excessive messaging
activity, which involved hundreds of thousands of orders for more than 19 million
shares, occurred two to three times per day." [112][113]
Spoofing and layering[edit]
Main articles: Spoofing (finance) and Layering (finance)
In July 2013, it was reported that Panther Energy Trading LLC was ordered to pay
$4.5 million to U.S. and U.K. regulators on charges that the firm's high-frequency trading
activities manipulated commodity markets. Panther's computer algorithms placed and
quickly canceled bids and offers in futures contracts including oil, metals, interest rates
and foreign currencies, the U.S. Commodity Futures Trading Commission said. [114] In
October 2014, Panther's sole owner Michael Coscia was charged with six counts of
commodities fraud and six counts of "spoofing". The indictment stated that Coscia
devised a high-frequency trading strategy to create a false impression of the available
liquidity in the market, "and to fraudulently induce other market participants to react to
the deceptive market information he created".[115]
In November 7, 2019, it was reported that Tower Research Capital LLC was ordered to
pay $67.4 million in fines to the CFTC to settle allegations that three former traders at
the firm engaged in spoofing from at least March 2012 through December 2013. The
New York-based firm entered into a deferred prosecution agreement with the Justice
Department.[116]
Market manipulation[edit]
Main article: Market manipulation

In October 2014, Athena Capital Research LLC was fined $1 million on price
manipulation charges. The high-speed trading firm used $40 million to rig prices of
thousands of stocks, including eBay Inc, according to U.S. regulators. The HFT firm
Athena manipulated closing prices commonly used to track stock performance with
"high-powered computers, complex algorithms and rapid-fire trades", the SEC said. The
regulatory action is one of the first market manipulation cases against a firm engaged in
high-frequency trading. Reporting by Bloomberg noted the HFT industry is "besieged by
accusations that it cheats slower investors".[117]

Advanced trading platforms[edit]

Advanced computerized trading platforms and market gateways are becoming standard
tools of most types of traders, including high-frequency traders. Broker-dealers now
compete on routing order flow directly, in the fastest and most efficient manner, to the
line handler where it undergoes a strict set of risk filters before hitting the execution
venue(s). Ultra-low latency direct market access (ULLDMA) is a hot topic amongst
brokers and technology vendors such as Goldman Sachs, Credit Suisse, and UBS.[118][119]
[120]
 Typically, ULLDMA systems can currently handle high amounts of volume and boast
round-trip order execution speeds (from hitting "transmit order" to receiving an
acknowledgment) of 10 milliseconds or less.
Such performance is achieved with the use of hardware acceleration or even full-
hardware processing of incoming market data, in association with high-speed
communication protocols, such as 10 Gigabit Ethernet or PCI Express. More
specifically, some companies provide full-hardware appliances based
on FPGA technology to obtain sub-microsecond end-to-end market data processing.
Buy side traders made efforts to curb predatory HFT strategies. Brad Katsuyama, co-
founder of the IEX, led a team that implemented THOR, a securities order-management
system that splits large orders into smaller sub-orders that arrive at the same time to all
the exchanges through the use of intentional delays. This largely prevents information
leakage in the propagation of orders that high-speed traders can take advantage of. [121] In
2016, after having with Intercontinental Exchange Inc. and others failed to prevent SEC
approval of IEX's launch and having failed to sue as it had threatened to do over the
SEC approval, Nasdaq launched a "speed bump" product of its own to compete with
IEX. According to Nasdaq CEO Robert Greifeld "the regulator shouldn't have approved
IEX without changing the rules that required quotes to be immediately visible". The IEX
speed bump—or trading slowdown—is 350 microseconds, which the SEC ruled was
within the "immediately visible" parameter. The slowdown promises to impede HST
ability "often [to] cancel dozens of orders for every trade they make".[122]
Outside of US equities, several notable spot foreign exchange (FX) trading platforms—
including ParFX,[123] EBS Market,[124] and Thomson Reuters Matching[125]—have
implemented their own "speed bumps" to curb or otherwise limit HFT activity. Unlike the
IEX fixed length delay that retains the temporal ordering of messages as they are
received by the platform, the spot FX platforms' speed bumps reorder messages so the
first message received is not necessarily that processed for matching first. In short, the
spot FX platforms' speed bumps seek to reduce the benefit of a participant being faster
than others, as has been described in various academic papers. [126][127]

See also[edit]
 Complex event processing
 Computational finance
 Dark liquidity
 Data mining
 Erlang (programming language) used by Goldman Sachs
 Flash Boys
 Flash trading
 Front running
 Hedge fund
 Hot money
 Market maker
 Mathematical finance
 Offshore fund
 Pump and dump
 Jump Trading
 Outline of finance § Quantitative investing

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External links[edit]
 Preliminary Findings Regarding the Market Events of May 6, 2010, Report of the staffs
of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues, May
18, 2010
 High-Frequency Trading: Background, Concerns, and Regulatory
Developments Congressional Research Service
 Where is the Value in High Frequency Trading? (2010) Álvaro Cartea, José Penalva
 High Frequency Trading and the Risk Monitoring of Automated Trading (2013) Robert
Fernandez
 Regulating Trading Practices (2014) Andreas M. Fleckner, The Oxford Handbook of
Financial Regulation

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Hedge funds

Capital structure arbitrage

Convertible arbitrage
bitrage /
Equity market neutral
ve value
Fixed income arbitrage / fixed-income relative-value investing
Statistical arbitrage

Volatility arbitrage

Activist shareholder

nt-driven Distressed securities

Risk arbitrage

Special situation

rectional Convergence trade

Commodity trading advisors / managed futures account

Dedicated short

Global macro
 Long/short equity

Trend following

Other
Fund of hedge funds / Multi-manager

gorithmic trading

ay trading

gh-frequency trading

ime brokerage

ogram trading

oprietary trading

Commodities

Derivatives

Equity
Markets
Fixed income

Foreign exchange

Money markets

Structured securities

Arbitrage pricing theory

Assets under management

Black–Scholes model (Greeks: delta neutral)

Capital asset pricing model (alpha / beta / security characteristic line)

Misc Fundamental analysis

Hedge

Securitization

Short

Taxation of private equity and hedge funds

Technical analysis

ulture funds

amily offices

nancial endowments

und of hedge funds

gh-net-worth individual

stitutional investors
surance companies

vestment banks

erchant banks

ension funds

overeign wealth funds

und governance

edge Fund Standards Board