{"id":1032,"date":"2012-09-30T14:34:05","date_gmt":"2012-09-30T14:34:05","guid":{"rendered":"http:\/\/ncjolt.org\/?p=1032"},"modified":"2020-06-04T20:54:07","modified_gmt":"2020-06-04T20:54:07","slug":"sec-cant-seem-to-get-a-handle-on-newfangled-computers","status":"publish","type":"post","link":"https:\/\/journals.law.unc.edu\/ncjolt\/blogs\/sec-cant-seem-to-get-a-handle-on-newfangled-computers\/","title":{"rendered":"SEC Can\u2019t Seem to Get a Handle on Newfangled Computers"},"content":{"rendered":"

Wednesday, September 26, 2012, by Justin Mann
\nOn September 19, Emm Holdings, LLC filed a complaint in the United States District Court for the Eastern District of Wisconsin.\u00a0 Suing under the Freedom of Information Act, the firm is seeking evidence of the SEC\u2019s inability to regulate the exploding field of \u201chigh-frequency trading\u201d (HFT).\u00a0 HFT consists of a huge number of trades (millions every second<\/a>) conducted by computers using sophisticated algorithms, written by some of the smartest mathematicians<\/a> in the country, with little to no human input<\/a>.\u00a0 With so many trades being conducted at such fast speeds, problems are bound to come up.\u00a0 The most recent debacle involved Knight Capital Group\u2019s computers using new software to submit erroneous trades that cost the firm $440 million<\/a>.\u00a0 Unfortunately, the SEC\u2019s own chairman has said the agency is \u201chard-pressed to keep up with the financial industry, especially where technology is involved<\/a>.\u201d\u00a0 Commentators have not been as kind, analogizing the SEC to \u201cpitting Barney Fife against Michael Corleone<\/a>\u201d or the traders driving Ferraris while the SEC is riding a bicycle<\/a>.\u00a0 The question then becomes, \u201cWhat should the SEC be doing?\u201d<\/p>\n

\u00a0Suing under the Freedom of Information Act, the firm is seeking evidence of the SEC\u2019s inability to regulate the exploding field of \u201chigh-frequency trading\u201d (HFT).<\/span><\/p><\/blockquote>\n

One thought is that the SEC should require traders to test software before allowing it to operate in the market.\u00a0 As it happens, in 1989, the SEC passed the second version of its Automation Review Policy<\/a>, in which it set out specific recommendations for what firms employing high-frequency trading should do for new and existing software: (1) estimate trade capacity, (2) periodically conduct capacity tests, and (3) have independent software assessments conducted annually.\u00a0 The problem is the ARP is voluntary<\/a>.\u00a0 The good news is that the SEC just recently hinted<\/a> at strengthening this policy, despite the Government Accountability Office, back in 2004<\/a>, suggesting stricter software testing like that in ARP.
\nThe pinnacle of the SEC\u2019s behind-the-times technology is its current approach to investigating potential regulatory violations \u02d7 After sending a request for information to a firm and other sources of data, the SEC can wait weeks<\/a> to receive it.\u00a0 Even after receiving the information, they are not seeing all of the orders, and the lack of synchronized times between the 15 exchanges<\/a> can prevent the SEC from developing a proper sequence<\/a> of trades. \u00a0The SECs $4 billion solution is a consolidated audit trail (CAT)<\/a> system, which would include all orders from all exchanges tracked in one system, based on one synchronized clock, with real-time monitoring capabilities. \u00a0The industry\u2019s problem with this system is that the SEC wants the exchanges to foot the bill, which would likely be passed downstream to traders in the form of order fees<\/a>.\u00a0 As others have already suggested per-order fees as a way of deterring high-volume trading<\/a>, this could be a way for the SEC to limit the profitability of manipulation through HFT, without getting tagged with over regulation or burdens of administration.
\nOther suggestions for regulating HTF include setting 50 milliseconds<\/a> as a minimum amount of time between buy and sell orders or automated surveillance<\/a> that would warn traders of their potentially illegal activity.\u00a0 Regardless of what the SEC ultimately decides to do, recent events seem to highlight the need for action.<\/p>\n","protected":false},"excerpt":{"rendered":"

Wednesday, September 26, 2012, by Justin Mann On September 19, Emm Holdings, LLC filed a complaint in the United States District Court for the Eastern District of Wisconsin.\u00a0 Suing under the Freedom of Information Act, the firm is seeking evidence of the SEC\u2019s inability to regulate the exploding field of \u201chigh-frequency trading\u201d (HFT).\u00a0 HFT consists …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[51],"tags":[],"_links":{"self":[{"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/posts\/1032"}],"collection":[{"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/comments?post=1032"}],"version-history":[{"count":1,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/posts\/1032\/revisions"}],"predecessor-version":[{"id":7689,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/posts\/1032\/revisions\/7689"}],"wp:attachment":[{"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/media?parent=1032"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/categories?post=1032"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/tags?post=1032"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}