From MarketWatch:
Study by CFTC official questions legality of HFT practice
An official at the Commodities Futures Trading Commission has authored a study questioning the legality of a common practice by high-frequency trading firms.
The study, written by Greg Scopino, who works in the Division of Swap Dealer and Intermediary Oversight for the CFTC, argues that the activity of high-speed pinging — the action of entering small marketable orders to learn about larger hidden orders in dark pools — might be a violation of the Commodity Exchange Act.
The paper, written for the Connecticut Law Review, says that since many high-speed “pinging” orders involve sending out large numbers of orders that are mostly cancelled, the prices are what are called “non-bona fide,” which are prohibited by law.
See link to the study
“Therefore, one could argue that at least some of the trades in a high-speed pinging scheme are ‘false orders’ that are submitted solely to flush out other traders,” the study said.
The study also compared the practice to “spoofing,” which is the bidding or offering with the intent to cancel right before execution.
“Given the high cancellation rates of trading by HFT firms, that behavior is arguably a component of many high-speed trading strategies, all of which are presumably illegal,” the study said.
In addition, the article compared high-speed pinging to “banging the close,” where a trader buys or sells a large amount of orders contracts during the closing of a futures contract.On the stock market:
Pinging was also compared to wash trading, the practice of entering into or purporting to enter into transactions without incurring market risk or changing the trader’s market position but gives the appearance that a transaction was made.
Both practices are prohibited by law.
“Both wash trading and banging the close use trades to create the illusion that there is more activity in the market than there actually is, or to deceive others as to the true nature of the trading activity in the market,” the study said....MORE
April 2014
(sorta) HFT: The SEC Says Quote Stuffing and Spoofing Is Illegal
February 2014
"High-Speed Trading Isn't About Efficiency—It's About Cheating"
The most egregious tactic is quote stuffing which is in direct violation of black letter law, both the Exchange act and 15 USC § 78i which reads, in part:March 2013
...(2)To effect, alone or with 1 or more other persons, a series of transactions in any security registered on a national securities exchange, any security not so registered, or in connection with any security-based swap or security-based swap agreement with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.Got it? The entry of orders for the purpose of other than actually transacting in the security at the given price -- that is, to induce others to trade, to raise or lower the price, to do anything other than to actually transact -- is illegal.
Period....
"HFT-Limiting Experiment Underway in Germany"
August 2013
Attention Securities Litigators: "HFT Quote Churn "Spam" Soars To Record As Volume Plummets"
August 2012
Dear Mary Shapiro: HFT and the Act of '34
January 2011
Fighting Fire With Fire: Beating the High Frequency Traders at Their Own Game
HT: The Market Ticker who headlines his postThere are more but I'm sure weary reader gets the point, HFT as practiced in the U.S. violates Federal law.
"Your Bazooka? It's Up Your Butt. Go Ahead And Fire." and goes on to mention one of my favorite bits o'securities law:
...Look folks, this is simple: Section 9 of the Securities Act of 1934 makes it unlawful for any person to create a false and misleading appearance of trade, or to influence a price, or to induce the purchase or sale of securities by others....The '34 act is known as the "Exchange Act" among the cognescenti, to distinguish it from the act of '33.That quibble aside, Mr. Denninger could be proposing the SEC Attorney Full Employment Plan of 2011.And it uses existing law.No need for the SECAFE Act of 2011.
Period.
