Athena Capital Research LLC used $40 million to rig prices of thousands of stocks including EBay Inc. for at least six months in 2009, U.S. regulators said today when fining the high-speed trading firm $1 million.
Using a system dubbed “Gravy,” Athena manipulated shares of Nasdaq-listed stocks, undermining the exchange operator’s end-of-day procedures for reducing price volatility, according to the Securities and Exchange Commission. With “high-powered computers, complex algorithms and rapid-fire trades,” the New York-based firm tainted closing prices used by fund managers to track their performance, the SEC said.
Athena is the regulator’s first market manipulation case against a firm engaged in high-frequency trading, an industry besieged by accusations that it cheats slower investors. Following more than a decade of regulatory changes spurred by the SEC as well as technological improvements, the firms have displaced humans as the primary traders in many markets including the $22 trillion U.S. equity business.
“Traders today can certainly use complex algorithms and take advantage of cutting-edge technology, but what happened here was fraud,” Andrew J. Ceresney, director of the SEC’s division of enforcement, said today in a statement announcing the allegations.
Athena didn’t admit or deny any wrongdoing in settling the case.
From at least June 2009 through December of that year, Athena placed large transactions for stocks in the final two seconds of Nasdaq Stock Market trading, right before 4 p.m. New York time, driving prices “slightly higher or lower,” according to the SEC. “The manipulated closing prices allowed Athena to reap more reliable profits from its otherwise risky strategies.”
Athena deployed about $40 million into the manipulation scheme, the SEC said. Despite Athena’s small size, “it dominated the market for these stocks in the last few seconds,” according to the regulator’s order. “Its trades made up over 70 percent of the total Nasdaq trading volume of the affected stocks in the seconds before the close of almost every trading day.”
Athena targeted situations where buyers and sellers of Nasdaq stocks were out of balance, the SEC said. Through its strategy, Athena manipulated the daily closing auction, the commission said. That process sets end-of-day levels for Nasdaq stocks, information used by fund managers to track their performance.
In the complaint, the SEC said that amid concern regulators would discover their scheme, Athena’s chief technology officer wrote to other managers: “Let’s make sure we don’t kill the golden goose.”
Larry Tabb, chief executive officer of research firm Tabb Group LLC, said he was surprised by the seemingly small size of the fine, given the scale of the alleged trading by Athena. Tabb added that as far as he knows, the imbalance process at Nasdaq is largely unchanged from 2009.
Rob Madden, a Nasdaq spokesman, declined to comment.
Today’s settlement, and the SEC’s claim that it’s the agency’s first high-frequency trader manipulation case, suggest that scrutiny of this area of the market isn’t going to abate, Tabb said.
“There’s no question they’re looking over market information much closer than they have ever been,” Tabb said. “I don’t think the oversight on trading is going to relax anytime soon.”
Athena’s strategy was allegedly to take advantage of messages that Nasdaq sent out ahead of its close, which tell traders if there are imbalances between orders to buy and sell certain stocks. If an imbalance message showed a buy imbalance of 10,000 in a company’s shares, Athena would place an order to sell 10,000 shares at the close and then try to buy those 10,000 shares in the final few minutes of the day, the SEC said.
“We have a desired accumulation pattern which includes grabbing stock at the beginning, a period of ‘average price’ accumulation, and a crescendo at the end,” one Athena manager wrote in an e-mail cited in the SEC order.
As Athena grew more confident in the approach, it could “fine-tune its strategies to maximize its profits,” said the regulator. In November 2009 alone it traded in nearly 13,000 securities, according to the order.
The strategy wasn’t without its risks. In one day in June 2009, when Russell Investments revised the membership and weightings for its indexes, Athena lost between $2 million and $3 million, the SEC said.
SEC Chair Mary Jo White said the regulator is conducting other investigations of the industry.
“We do have a number of investigations that do involve the market practices of high-frequency traders,” she said today in Toronto.