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SEC probe investigates HFT

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The fact that the SEC is looking at the high-speed, collocation-driven low latency services offered by exchanges is hardly a surprise.

In the wake of the May 6, 2010, Flash Crash, the CFTC and the SEC have engaged in a wide-raging review of market structure, which many feel could use an update in the face of modern trading practices. The issue in this particular area of the probe appears to be the low-latency linkages between the top exchanges and high frequency firms like Getco and Tradebot.

As for exchanges, the top focus would appear to be BATS, which has just suffered a humiliating implosion of its much-discussed IPO process, which resulted in it pulling its offering at the last minute. Direct Edge is also said to be a focus of the inquiry. You would have to think that investigators will look at NYSE Euronext and Nasdaq OMX as well, but that has yet to be confirmed.

The issue is whether there is any collusion going on that would disadvantage certain firms and limit competition and lead to market manipulation. Direct feeds are also an issue, though this issue has been percolating along for at least a year. Many have suggested that buy-side players who still rely on the traditional consolidated feed are at a huge disadvantage against firms that use direct fees.

These feeds can be rather expensive but they deliver information faster. All in all, the specifics of how high-frequency firms and the all-electronic exchanges interact remain something of a black box. It will be interesting to see what the probe uncovers.

For more:
- here's an article from FOX Busines

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