According to the Wall Street Journal, the Securities and Exchange Commission is investigating whether high-frequency trading firms are manipulating their close ties with computerized stock exchanges, and whether firms collude to limit competition or manipulate markets in order to gain an unfair advantage over other investors. The investigation is being handled by the enforcement staff of the SEC, and emerges from the May 2010 “flash crash” where regulators began looking at computer trading.
One of the firms being investigated for trading irregularities by the SEC is BATS Global Markets, Inc. According to the BATS IPO filing in February, BATS received a request for more information from the SEC for information related to communications with certain market participants and BATS members affiliated with certain BATS stockholders and directors. The Wall Street Journal reports,
The SEC is examining, among other things, whether high-frequency firms benefit from delays in the dissemination of prices from various corners of the markets, according to a person familiar with the matter. High-speed firms use direct feeds from exchanges that can give them a leg up on slower traders, critics say.
While most investors rely on feeds that consolidate prices throughout the market, high-frequency traders can access prices a split second faster through their access to direct feeds, experts say.
They do so through a practice known as “collocation,” in which they place their trading computers in the same data center that houses the exchange’s computer servers. The SEC also is examining fees that exchanges pay out to draw-in high-speed trading orders, according to the people familiar with the matter.
Also included in the SEC’s probe are Getco LLC and Tradebot Systems, Inc., high-frequency trading firms that invested in BATS. The investigation is also examining communications between other high-frequency trading firms and Direct Edge Holdings LLC, a company that runs computer-driven exchanges. The SEC’s probe is in its early stages with regulators requesting information from the high-frequency firms and the exchanges about trading activities and communications.