High-frequency trading is the latest craze hitting the market. Popularized by Michael Lewis's Flash Boys, high-frequency or high-speed trading involves the use of sophisticated technological tools and computer algorithms to rapidly trade securities. According to Bloomberg BusinessWeek, high-frequency trading has been "blamed for making stock exchanges less transparent and markets more volatile [and] has disrupted the process of trading stocks that determines the value of public companies." Yet, I was recently told by counsel for the Securities and Exchange Commission and FINRA (at a 2014 Securities Litigation & Regulatory Update CLE in Philadelphia) that there is "nothing inherently bad" about high-frequency trading. That said, these agencies are still looking for ways to safeguard investors.
FINRA recently approved various proposed rule changes regarding high-frequency trading, aimed at increasing transparency. Additionally, the government has prosecuted traders for using high-frequency trading technology to manipulate the market. For example, in October, the SEC fined an investment company for manipulating the closing prices of securities with a flurry of last second trades before the market closed. That same month, the U.S. Attorney's office in Chicago indicted a trader for placing and then rapidly cancelling orders to manipulate perceived demand, a tactic that has become known as "spoofing".
The takeaway here is that, while high-frequency trading is still permitted—so long as it complies with FINRA's new guidance and is not intended to manipulate markets and exploit other investors—the regulatory and enforcement landscape is starting to change. Thus, companies and in-house counsel should continue to monitor developments in how the government plans to handle high-frequency trading.
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