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A Former SEC Enforcer On Slowing Down HFT

After years of trading near the speed of light can regulators realistically place a speed limit on high frequency trading? Mark Fickes, a former attorney for the SEC enforcement division and currently with BraunHegey & Borden of San Francisco, weighs in.

Advanced Trading: You worked in the enforcement division of the SEC for eight years. Is the SEC's plan to slow down high-frequency trading realistic in our fast-paced world?

Mark Fickes: The potential is there. How it would manifest itself is a little unclear [but there are] different ways the regulators can go about this.

There has been a lot of public sentiment in asking firms for their data, the quantitative algorithms and how they go about doing their trades. For firms that are registered investor advisers, they have to comply with these requests for information.

Read Advanced Trading's March 2012 cover story on the SEC's call to slow down HFT.

Part of this could be a PR campaign where you go into firms and ask for data. It was recently announced that the CFTC is forming a subcommittee on this matter? HFTs to take a look at the industry what should be disclosed or not – so this will help form committees and make requests for information from companies.

Another way the SEC can do this is they can make a case for market manipulation or something else that is improper. This could be via enforcement actions as another way but that's the heart of it. You'll need evidence that something has gone wrong or was fraud and you have to investigate it and get the evidence together to improve it.

Advanced Trading: What about the other proposals?

Fickes: Another proposal out there is the regulators are thinking about taxing these transactions. It could be very small, .01 percent, which wouldn't heavily burden individual investors but it would reduce the overall profitability of the trade. I think the Europeans are looking at heavier taxes. I don't know if that would fly in America where we are less fond of high taxes.

Advanced Trading: There's also a proposal to place a fee on all cancelled orders.

Fickes: Exactly, taxation and cancellation fees. There are ways to put filters on the market. One idea is that when an order is placed, that order has to be exposed for one full second. So whatever algos you use to go to market can slow down the trades. You literally slow them down.

One of the things that is most interesting - just from the astronomical costs - is the proposal for the Consolidated Audit Trail or CAT that the SEC has been floating for a couple of years. I think the initial estimate was that it would take three to four years to build at a cost of about $4 billion to build and then $2 billion to operate. SEC Chairman Shapiro went to Congress a few months later and said that these things could be done more cheaply.

Advanced Trading: Why are these proposals coming up now?

Fickes: Clearly, this is one of those things [that happened] in the wake of MF Global and other financial firms. What you are seeing on the part of government regulators is they are publicly acknowledging that there is a problem. Ultimately the problem is you can propose rules and laws but for any impact on the HFTs to occur, most economists are skeptical that you can eliminate another Flash Crash.

The capital markets are pretty resilient and the people in them are industrious in finding ways to make money. It's like finding all the leaky holes in the boat - you have to plug it up to stop the water before another hole comes out.

Advanced Trading: After the protests by Occupy Wall Street, firms are slashing bonuses and making fewer risky loans. Will these practices reign in HFT?

Fickes: I don't think it's likely. Bonuses are easy cosmetic fixes and they hope that the public forgets about it in a year or so. People will still be making a lot of money.

Hedge funds have spent a lot of time and money creating these types of intellectual properties to maximize returns for their investors. Not withstanding congress and Occupy Wall Street, they are in the business of maximizing capital. I don't foresee [firms walking away from high frequency trading]. People are interested in these quant trading models. It fuels a lot of people and I don't see it going away any time soon.

Advanced Trading: The SEC can ask to see these algorithmic formulas but why would hedge funds reveal their secret sauce?

Fickes: That's a huge concern and it makes me wonder what the answer is. Having been in SEC enforcement, I know that information gathered is confidential and not made public. There are potential of criminal penalties attached to the disclosure of that type of information but what are you supposed to do with an analyst who learns about how something works? He doesn't disclose this and then he goes back into private practice in the industry - how do you filter that? Do you wall him off from doing anything with quantitative programming? That will limit his marketability. That's a very realistic concern and I haven't seen any proposal on how to address that.

Advanced Trading: How does the SEC hire anyone with the right knowledge and say they can't trade for five years?

Fickes: There's no simple answer to the question of the revolving door particularly when this deals with highly competitive, proprietary information in which these firms have invested millions of dollars.

From my own experience, when you work for the SEC your trading is radically limited and you take the job for various reasons. If you do this you are limiting the appeal of working for the SEC for a while. The SEC has reached out to get more industry experts but they don't want to cut off their nose to spite their face.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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