Nanex ~ 01-Feb-2014 ~
|October 1, 2010||SEC final Flash Crash Report is published.|
|August 8, 2011 to
October 18, 2011
|HFT firm manipulates the oil futures markets with spoofing.|
|November 7, 2011||An academic paper, co-authored by Dr. Kirilenko is published. The paper mentions an ongoing CFTC investigation, which turns out to be the Panther Energy fine.|
|July 22, 2013||CFTC announces Panther Energy fine for spoofing the oil market.|
It took the CFTC a full 21 months to bring action against an HFT firm for manipulating oil futures. Maybe that is the normal pace for government action, but right now, it is the least of our concern. There is something far more egregious exposed by this academic paper than the glacial pace of enforcement action, and it has to do with the question:
What did the SEC know, and when did they know it?
The paper clearly establishes that regulators (SEC and CFTC) were aware of illegal HFT manipulation strategies involving fast order cancellation rates. They knew this in November 2011, and probably many months earlier, considering the time it takes for an academic paper to get published.
If we juxtapose this knowledge with recent statements made by regulators regarding HFT, manipulation and high order cancellation rates, we see denial, uncertainty and doubt. We have even witnessed the regulator being told to shut down an academic program which was investigating other HFT manipulation strategies. That program was headed by none other than Dr. Andrei Kirilenko, who left the CFTC 2 months earlier.
What we don't see are actions or policy changes, or even discussions about reigning in HFT manipulation. This lack of regulator attention shows up in the market: the evidence of the same behavior continues to pile up, to the point that
HFT manipulators believe they are untouchable.
Just this week we refuted a claim made by a recently formed HFT lobbyist group who stated that there was no value to rapidly placing and cancelling orders and therefore HFT wouldn't do that. The week before, the CEO of an exchange expressed no concern about flickering quotes, which are a manifestation of HFT rapidly placing and cancelling orders.
A paper co-authored by the former CFTC Chief Economist makes it clear that regulators have known about High Frequency Trading manipulation in both stocks and futures as early as November 2011, and that this behavior is common and detectable. The appropriate response is for regulators to impose frequent fines and guidance to ensure a fair market place.