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SEC Is Going To Take Your High Frequency Trading Algorithm, Run It On A Commodore 64, See If It Crashes The MarketBy Matt Levine
After decades of responding to tips about fraud by writing notes on napkins and then throwing them away, the Securities and Exchange Commission finally got itself some computers and is excited to put them to use. Legitimate use. First up: figure out if maybe the computers are in fact the problem.
U.S. securities regulators have taken the unprecedented step of asking high-frequency trading firms to hand over the details of their trading strategies, and in some cases, their secret computer codes.
The requests for proprietary code and algorithm parameters by the Financial Industry Regulatory Authority (FINRA), a Wall Street brokerage regulator, are part of investigations into suspicious market activity, said Tom Gira, executive vice president of FINRA’s market regulation unit….
SEC examiners want the information to ensure that hedge funds are actually using the strategies they market to investors. They also review it to make sure that algos are not being used to manipulate the market.
If you were considering just submitting a confusing fake algorithm to cover up the fact that your algorithm does in fact operate by manipulating the market and/or that you’re running a Ponzi scheme and your “algorithm” involves mainly blowing investor money on personal expenses, and you were thinking that the SEC isn’t computer savvy enough to notice – well, you’re not alone:
Even though the SEC believes it needs this algorithm information to help it police the market, many on Wall Street are still not convinced the agency will know what to do with the data.
“Let’s just say the good developers in the industry are being hired by the industry — not by an SEC salary,” a trader said.
But you might be wrong. Reuters reports that the SEC has acquired a couple of Ph.D. and ex-industry quants, headed by Rick Bookstaber, formerly of Bridgewater and other hedge funds. So they may well understand the finer nuances of your trading algorithms. Though that too might be objectionable:
It has alarmed some traders who are afraid their “secret sauce” — intellectual property sometimes developed over years and at great cost — could get into the wrong hands, especially when SEC and FINRA examiners leave for the private sector.
“I’d be disappointed and upset” if they asked for code, said a high-frequency trading firm executive who declined to be named. “I mean, are these people all going to work at the SEC forever?”
Regulators seek trading secrets [Reuters]