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From Securities Regulation Daily, October 16, 2014

SEC settles first high-frequency-trading manipulation case

By Anne Sherry, J.D.

A New York high-frequency-trading firm has agreed to pay $1 million to settle SEC charges that it used an algorithm to “mark the close” of NASDAQ-listed stocks through aggressive last-second trading. SEC Enforcement Director Andrew J. Ceresney clarified that while traders are free to use complex algorithms and cutting-edge technology, “what happened here was fraud.”

Trading strategy. According to the order instituting proceedings, the manipulation by Athena Capital Research focused on order imbalances. Ten minutes before the close of trading, NASDAQ begins releasing information about stocks that show an imbalance between buy orders and sell orders. NASDAQ runs a closing auction to fill all orders, using its own algorithm to match sellers and buyers at the price nearest the last trade before the close. Over the latter half of 2009, Athena used “Collar” algorithms to ensure that its orders received priority when trading imbalances, then unleashed an algorithm it codenamed “Gravy” to trade large numbers of stocks in the two seconds before the close of trading. Athena’s having marked the close in this way, its imbalance-on-close orders were executed at more favorable (In Re Athena Capital Research, LLC, October 16, 2014).

Knowledge. The SEC alleged that Athena was concerned about regulatory scrutiny of its orders. When NASDAQ issued an alert warning that suspicious orders or quotes would be reported to FINRA, the CTO forwarded the alert to others involved in the scheme with the message, “Let’s make sure we don’t kill the golden goose.” The order also relates that a newly hired officer advised the CTO to get a legal opinion on Athena’s trading strategies and use certain search terms to research the trading “at home, not here.” The CTO stopped using Athena’s mail servers to email others in the firm about the trading, but did not obtain a legal opinion.

First of its kind. Last month saw the SEC’s first case against a high-frequency-trading firm, for violations of the net capital rule. The case against Athena is the first to go after manipulation via high-frequency trading. In their statements about the settlement, SEC officials were careful to describe the conduct as fraudulent. Chair Mary Jo White said, “When high frequency traders cross the line and engage in fraud we will pursue them as we do with anyone who manipulates the markets.” Director Ceresney agreed, stating, “Traders today can certainly use complex algorithms and take advantage of cutting-edge technology, but what happened here was fraud.”

“This action should send a clear message that the Commission and its Division of Enforcement have the expertise to investigate and charge even the most sophisticated fraudulent algorithmic trading strategies,” Director Ceresney continued. The Enforcement Division worked closely with the SEC’s Division of Economic Risk and Analysis and the Quantitative Analytics Unit.

The Release is No. 34-73369.

Companies: Athena Capital Research, LLC

MainStory: TopStory FraudManipulation

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