From the dawn of the 21st century and the breakthrough of the information age we are vastly accustomed to increasingly bipolar views. For two months now we have been hearing a vast array of opinions on high-frequency trading (HFT) and until now we see no middle ground on this matter.
There are only two sides to the coin – one is either with the abusers of a favourably (for them) designed market infrastructure or with the victims of alleged front-running. So it was about time to finally hear major global regulators speaking out loudly and taking their own stance. Last week the Financial Conduct Authority’s (FCA) CEO, Martin Wheatley and the Securities and Exchange Commission’s (SEC) Chair, Mary Jo White, each presented their cases and their views on HFT to the public.
Class Action Lawsuit
Coincidentally all of this happens only a week after a new class action lawsuit was filed against a plethora of stock exchanges – the NYSE, NSE, NASDAQ, CBOE, CSE and BATS are all in this together. The lawsuit has quite different grounds from what we have seen so far – it is targeting the public function of the exchanges.
Ironically the lawyer’s name behind the class action lawsuit is Michael Lewis, but it’s not the renowned author of the hit title “Flash Boys”. It’s the lawyer who has already accomplished the unthinkable by winning a lawsuit against big tobacco companies back in 1994 and winning for the state of Mississippi a record $368.5 billion judgment to pay for the medical costs associated with treatment of patients with smoking related illnesses.
The new HFT suit alleges that profit activities of exchanges are creating conflicts of interest and are diminishing their self-regulatory roles and goes on to add that the dissemination of market data to certain subscribers is not a fair practice as per current legislation.
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Next to these allegations, the claim by FCA’s CEO, Martin Wheatley, that the first front-running dates back to the 19th of June 1815, when Nathan Rothschild used spies and fast horses with more frequent changeover points and co-located himself on the LSE, sounds to public ears as nothing but outrageously misguided.
If we compare the regulatory structure of the market in 1815 to the one today, there is no measure to express the differences. Was the market fairer and more transparent back in the 19th century? Judging by the amount of people who were able to trade on it, it was rather poorly designed when compared to nowadays.
SEC Goes on to Further Investigate
SEC’s Chair, Mary Jo White, has not been as determined to support HFT in her statement, however, she refrained from providing significant details on what needs to be done to restore the shattered public credibility in market fairness. According to her statement, the SEC is in the process of “accessing the extent to which specific elements of the computer-driven trading environment may be working against investors rather than for them.”
“The Case is About Fairness”
According to the above-mentioned lawsuit “the case is about fairness.” Allegedly, fairness has been violated by failing to provide market data to all participants in a non-discriminatory manner and to add to this, the validity of the data is questionable, as the infrastructural access for a set part of market participants has been vastly different from what the rest of the customers of the exchange and the actual data that they see, has not been accurate in real time.
Looks like the HFT saga is not going to end anytime soon. We are attaching the full lawsuit filing for our more curious readers to have a look at.