High Frequency Trading: A Regulators' Burden

Over the last few weeks high frequency trading debate has hit the headlines with renewed force, inspiring hard-hitting comments from Attorney General Eric T. Schneiderman and Goldman's Gary Cohen. Each party debating HFT's benefit or lack thereof to the marketplace and questioning the need for tighter controls.

Are more rules the answer? Probably not, says NICE Actimize's capital markets compliance expert, Walter Ferstand. Instead, regulators need to invest in proper regulatory structures to detect infractions and enforce the rules already in place. As it stands, many of the tools, not to mention enforcers, aren't equipped to monitor market manipulation at the speed HFTs operate.

"Is it the high frequency trader's fault they created something the SEC can't understand? Regulators have to evolve with it. More rules aren't the answer," he says. "Amendments can be made, but they already say you have to keep integrity of the market place equal for all. If this type of HFT is deemed to be illegal, if it's found that it hurts the little investor, then it's not good for the market, but you'd have to have something to detect it first throughout the SEC."

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"You can't have an opinion on something that exists but you don't understand, and [HFTs] can't do something wrong until someone writes a rule that says they are," Ferstand adds. "These traders are in the business because it's not called illegal behavior, and we can't fault them because that's their business model… The problem I see isn't necessarily HFT, it's about regulatory bodies needing to keep pace and in many cases ahead of the market place to police it effectively."

Under the leadership of Mary Jo White SEC regulators are on a renewed fact finding mission to understand what HFT does and doesn't do to the market. Ferstand believes now that the litigations and examinations following the 2008 crisis are winding down there is a significant trend in investment by the SEC into software systems that will help detect evidence of illegal activity, and into beefing up the education of field examiners who have been hired directly from the marketplace they are asked to police.

Whether it is found HFT is hurting the market or not, from a regulatory standpoint it is imperative the SEC starts to put a microscope on this method of trading and build out enforcement tools. Individual investors have to feel regulators are watching out for them and without the knowledge to do anything on their own we turn to the SEC to be effective, to ask the right questions and act on sound information.

"The current view point is that HFTs are a small group of people hurting the little investor. In order to shut them down, curtail them or regulate them, regulators have to step up to the plate and effectively monitor them," concludes Ferstand. "If the regulators don't have the proper tools to police the HFT world then that's not correct. That's a problem that needs to be fixed." Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio