For fans of Michael Lewis’s Flash Boys, the SEC would like you to know that things are going splendidly on the high frequency crackdown front. In January 2015 alone, the agency brought three high frequency trading (HFT) suits against different sharks in the securities market.
One such shark is high frequency trader Aleksandr Milrud. Milrud layered trades for approximately two years starting in January 2013. Around the globe, Milrud’s recruits used HFT to fraudulently inflate and deflate stock prices to profit upon buying and selling at the altered price. To clear up any lingering confusion on the part of the SEC’s confidential broker informant, Milrud actually referred to the artificial price pressure as “the dirty work.” Milrud further explained that he usually wired his illicit profits to an offshore bank account and later met with an individual who would give him a suitcase full of cash.
The SEC’s complaint confirms that the agency believes “Milrud’s layering scheme was very lucrative. In the course of soliciting the [confidential informant’s] participation in his scheme, Milrud stated that one of his trading groups generated profits of approximately one million dollars per month.” Indeed, the complaint later outlines two examples of Milrud’s profiteering activities: Exhibit 1 involved an order that resulted in a $72.28 profit for the trader. Exhibit 2 clocked in a bit more conservatively at $60.74 worth of illegal profits. Milrud even “directed a wire transfer of $5,000 to a bank account located in New Jersey. The purpose of the transfer was to fund a trading account . . . so that Milrud’s traders could use the account to engage in layering.”
SEC v. Milrud is a relatively humorous anecdote which demonstrates the SEC’s larger high frequency trading (HFT) enforcement strategy: speak loudly and carry a small stick. Consider Milrud himself. He did not build an empire out of his indiscretions. He was brazen, oaf-like, and making a mere $60 to $80 off of any single trade. He played out of bank accounts numbering in the four digits, not with millions or billions dollars-worth of capital. Most importantly, his fraudulent activity was illegal whether he committed it through HFT or inflated stock prices one phantom bid at a time. Milrud’s criminal profits amounted to mere particles of a drop in the bucket of securities trading. But the SEC brought charges anyway and released a press release on their big capture to boot.
It seems obvious that the SEC does want to regulate HFT—but no more than it wants to regulate the securities industry overall. Vowing to determine how HFT truly hurts or helps investors, SEC Commissioner Mary Jo White asked her staff to analyze the potential effects of implementing an anti-disruptive trading rule, of increasing usage of algorithmic trading, and of unequal data feed access by market participants—among a list of additional HFT-related rules and activity. But these requests—stripped of their HFT verbiage—simply look like the analytical gaze to be expected of an industry regulator. The SEC wants to stay vigilant of potential problems, but the SEC does not seem to want to regulate HFT through new or improved means. The SEC wants to apply existing regulatory sanctions to market abuse, regardless of the means through which such abuse is effected.
The SEC is decidedly in favor of what HFT brings to the financial markets. Commissioner White said as much during her speech on June 5, 2014:
“Equity markets are, of course, now dominated by computer algorithms, which generate orders at a volume and speed that have transformed the nature of trading. Importantly, these algorithms are used not only by high-frequency traders, but also by or on behalf of investors. . . . [M]arket quality metrics show that the current market structure is not fundamentally broken, let alone rigged. To the contrary, the equity markets are strong and generally continue to serve well the interests of both retail and institutional investors.”
The SEC will undoubtedly continue to bring actions against HFT firms and players. But look carefully at these complaints and settlements. Consider whether the SEC is cracking down on HFT practices, or if the SEC is going after more traditional market abuse and is simply happy enough to let you think that HFT is in its crosshairs. So longs as it keeps Michael Lewis off Commissioner White’s back.
Lindsey Crump is an editor on the Michigan Telecommunications and Technology Law Review, and a member of the University Michigan Law School class of 2016.