From the October 01, 2010 issue of Futures Magazine • Subscribe!

High frequency problem

There's evil afoot

Ever since the May 6 flash crash there has been an attempt by some to paint high frequency trading (HFT) and its practitioners as evil market manipulators. However, most stories fail to grasp what these entities do, let alone how their activity would qualify as manipulation.

No one had successfully connected the dots of HFT and abnormal market activity until recently when real problem involving HFT came to light.

The Financial Industry Regulatory Authority (FINRA) on Sept. 13 fined New York-based Trillium Brokerage Services, LLC, $1 million for using “an illicit high frequency trading strategy and related supervisory failures.” According to FINRA, “Trillium, through nine proprietary traders, entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks.”

FINRA claims that Trillium created a false appearance of market pressure, which induced market participants to enter orders that would take the opposite side of orders placed by Trillium. Trillium then canceled the orders to create a “false appearance of market activity.”

Trillium and the individual respondents consented to the entry without admitting or denying the charges.

In an unrelated story on HFT, proprietary trading firm Infinium Capital Management had an error involving its trading software in the WTI crude oil futures market on Feb. 3 and has been the subject of an ongoing investigation by CME Group, according to Infinium.

Volume spiked in WTI that afternoon and the market rallied 51¢ in a matter of seconds near the end of the day.

According to an e-mailed statement from Infinium CEO Chick Whitman, “Infinium became aware of the error within seconds and immediately notified CME. Infinium has not been charged by the CME or CFTC.”

Whitman adds, “This incident was a result of human error in a software test group and the parties associated with this error are no longer with the firm. We have since made modifications to our software architecture to ensure that this type of error is never repeated.”

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