High-Frequency Trading Litigation in 2015: Explored

• Introductory overview – key areas of high frequency trading…economic considerations…assessing situations of litigation in high frequency trading situations 

Key Areas of High-Frequency-Trading-Related Litigation and Related Economic Issues

• Exchange-related Litigation:
  • Pertains to trading venues’ violation of stated rules and practices (Section 19):
    • Failure to adopt and present rules according to stated practice
    • Failure to comply with stated rules
  • Discussion of how financial economists may be able to assess materiality of disclosures and other customer representations
• Litigation against HFT Firms:
  • Relates to market manipulation and disruptive trading practices
  • Discussion of how financial economists would evaluate reasons for engaging in these practices
• Market Access Litigation:
  • Refers to the failure of broker-dealers to adopt adequate risk controls before providing customers access to markets
  • Summary of key cases and trends in this area

• Use of trade execution performance measures to evaluate performance to help investors avoid abuses
• Any reliance of alleged forces of fraud in current litigation
• Common reaction to recent Law Review article that argues commodities exchange act offers protection to investors

• Focus on FINRA’s increased focus on HFT/Algo trading supervision and controls
  • FINRA Exam Priorities for 2014 and 2015 – may see FINRA enforcement actions coming out of these, abusive algorithms part of focus, but interest much broader
    • Including a focus on Market Access controls
      • Important for broker-dealers with HFT clients
    • Including supervision and governance surrounding a firm’s trading technology and change management
    • E.g. June 25, 2014 Settlement with Citadel Securities LLC; March 28, 2014 Settlement with Cutler Group, LP.
  • Impending registration regime – The FINRA Board authorized FINRA to issue a Regulatory Notice seeking comment on a proposal to establish a registration requirement for associated persons who are: (1) primarily responsible for the design, development or for directing the significant modification of an algorithmic strategy; or (2) responsible for supervising such functions
  • The FINRA Board also authorized FINRA to publish a Regulatory Notice reminding firms of their existing supervisory obligations with regard to the development and deployment of algorithmic trading strategies.
• SEC planning new regulations to increase oversight of HFT firms
  • Require high-frequency traders to register as broker dealers
  • Establish an “anti-disruptive trading rule” that could restrict high-frequency traders from executing short-term strategies
  • Require firms to improve their management of trading algorithms and enhance regulatory oversight of their use