Interesting development on the high frequency trader issue:
FINRA, the self regulatory arm of the financial services industry, sanctioned Trillium Brokerage Services, along with their Director of Trading, their Compliance Officer, and 9 other traders over $2 Million dollars for what they called an “Illicit Equities Trading Strategy.”
“The Financial Industry Regulatory Authority (FINRA) today announced that it has censured and fined New York-based Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy and related supervisory failures. Trillium, through nine proprietary traders, entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks. By entering the non-bona fide orders, often in substantial size relative to a stock’s overall legitimate pending order volume, Trillium traders created a false appearance of buy- or sell-side pressure.
This trading strategy induced other market participants to enter orders to execute against limit orders previously entered by the Trillium traders. Once their orders were filled, the Trillium traders would then immediately cancel orders that had only been designed to create the false appearance of market activity. As a result of this improper high frequency trading strategy, Trillium’s traders obtained advantageous prices that otherwise would not have been available to them on 46,000 occasions. Other market participants were unaware that they were acting on the layered, illegitimate orders entered by Trillium traders.
FINRA’s issue with Trillium’s trading conduct was the claim of market manipulation. But the reality is simply that quote stuffing is inherently manipulative and misleading. 46,000 quotes over the course of a few hours — let alone seconds — should be unlawful.
Here is a simple solution to the HFT problem: The SEC mandates that all bids and quotes must last 2 seconds.
End of problem.
Hat tip Richard S
FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy
FINRA, September 13, 2010