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]

43 comments (hidden for your protection)
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Comments (43)

  1. Posted by Rahodeb | September 2, 2011 at 1:59 PM

    Rick Bookstaber? I couldn't come up with a better fake name for an SEC auditor if I tried.

  2. Posted by Anal_ist | September 2, 2011 at 2:05 PM

    Cut the SEC some slack. The only reason that Commodore 64s are being used is because capacity on newer computers is being used for a higher purpose – - Redtube.

  3. Posted by pazzo83 | September 2, 2011 at 2:08 PM

    I don't think the Commodore can handle our top performing algorithm, a² + b² = c²

    - UBS Quant

  4. Posted by Guesticulator | September 2, 2011 at 2:11 PM

    Matt, that is a really great headline. Well done.

  5. Posted by Biff | September 2, 2011 at 2:11 PM

    Precious! I figure a bunch of guys will be leaving the SEC soon to start a HF trading outfit. There's a certain class of people in this world that let others do the leg work.

    Just Sayin'

  6. Posted by Backoffice Monkey | September 2, 2011 at 2:12 PM

    The code? Sure… no problemo… Here you go:

    11110011110111001101010101110000001110
    11100001010110100000111000101010100011
    10010001010101010111111000001010100001
    10101000101010100101010101010000000110
    01011010101010101010000001101011011010

  7. Posted by Backdoor_Bess | September 2, 2011 at 2:12 PM

    Ahhh, bringing back memories of River Raid and Montezuma's Revenge…….pardon me, as I have just ruined my trousers.

  8. Posted by Mexi_Cant | September 2, 2011 at 2:13 PM

    I wanna cuddle.

    -Jimmy Simons.

  9. Posted by juniormistmaker | September 2, 2011 at 2:14 PM

    How could you tell people about our implied price triangulation algo!?!

    – UBS desk head

  10. Posted by Biff | September 2, 2011 at 2:18 PM

    Wow, this was a Matt story? I'm fucking impressed. No charts or spreadsheets makes the achievement even more impressive. The boy did good.

    Kudos.

  11. Posted by AIG Quant via LEH | September 2, 2011 at 2:22 PM

    Sorry, I think you meant: a^n + b^n = c^n

    UBS forever killing it with integers.

  12. Posted by merkin_capital | September 2, 2011 at 2:25 PM

    You'll have to pry my ColecoVision from my cold, dead hand.

  13. Posted by pazzo83 | September 2, 2011 at 2:25 PM

    Yes, writing algos with integers is the NKI

    - UBS Quant

  14. Posted by Dr_Rosenrose | September 2, 2011 at 2:27 PM

    You disgust me.
    -Fermat

  15. Posted by Optimus Quant | September 2, 2011 at 2:46 PM

    All of our algorithms run on refurbished Sega Genesis consoles, all of them have the "turbo" setting as on.

    –Every quant firm that isn't Rentech, D.E. Shaw or PDT.

  16. Posted by Biffy Bassness | September 2, 2011 at 2:50 PM

    I loved that computer. Those fat buttons….those fat buttons…..

  17. Posted by Guest | September 2, 2011 at 2:58 PM

    God bless this great country. God bless Ron Paul, and God bless Monsanto.

  18. Posted by STAR | September 2, 2011 at 3:09 PM

    Bring it, motherfuckers!

  19. Posted by derp | September 2, 2011 at 3:11 PM

    bleep blorp wokka wokka fizzzzzzz pffffth sizzzzzle

    - SEC_Commodore_64

  20. Posted by PermaGuestII | September 2, 2011 at 3:12 PM

    I'll see your ColecoVision, and raise you my Tandy T-1100HD "laptop"

  21. Posted by geoffgeoffgeoff | September 2, 2011 at 3:21 PM

    You guys are idiots. Our alpha formula is d = 16t2. d=divestitures, and t=leverage.

    -LEH Quant

  22. Posted by AppleSavingsQuant | September 2, 2011 at 3:21 PM

    PDT? That bar downtown is also an HFT shop?

    - Apple Savings Bank of New York Quant

  23. Posted by Nerd | September 2, 2011 at 3:27 PM

    That made me happy.

  24. Posted by Nerd | September 2, 2011 at 3:28 PM

    What? No chart? Not even psuedo-code? Process-flow chart?

  25. Posted by AIG Quant via LEH | September 2, 2011 at 3:49 PM

    Sorry, $hit like that always happens at DE Shaw, it's no big deal.

  26. Posted by AIG Quant via LEH | September 2, 2011 at 3:50 PM

    How's it going, fatty?

  27. Posted by MeVC | September 2, 2011 at 4:17 PM

    WTF…. this code looks like it was outsourced.

  28. Posted by Mr. Corn | September 2, 2011 at 4:19 PM

    Fk God, country, Ron Paul. But do bless MON,

  29. Posted by Secret C64 Algo | September 2, 2011 at 4:47 PM

    10 INPUT "Are you a female SEC employee? Y/N";A$
    20 IF A$="Y" THEN GOTO 40
    30 END
    40 INPUT "please enter your age:";A
    50 IF A>18 THEN GOTO 70
    60 GOTO 40
    70 PRINT "Meet me at Minetta's at 6PM. I'll be the one in the corner playing Jumpman Junior."
    80 END

  30. Posted by AIG Quant via LEH | September 2, 2011 at 5:11 PM

    You control flow sucks ass. Go back and try harder.

  31. Posted by MeVC | September 3, 2011 at 1:51 PM

    Was that Rick Bookstaber or Rick Backstabber?

  32. Posted by Chunk | September 4, 2011 at 12:45 AM

    All your algorithm are belong to us

    - Zero Wing enthusiast

  33. Posted by seaman bodine | September 4, 2011 at 7:21 AM

    I thought our lawyers covered this…shit, they lost?

    Two Sigma Quant, Seaman Bodine

  34. Posted by UBS Head Trader | September 4, 2011 at 12:48 PM

    I hope they won't take my Quotron away! How else will I get my stockquotes?

  35. Posted by FinneganKristiansen | September 6, 2011 at 6:34 AM

    Letting your secret sauce get into other's hands is the NKI

  36. Posted by HFguy | September 6, 2011 at 7:14 AM

    that is SEC Rick Rolling the HFTs

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