borrowed from........ From: CommanderCricket 9/2/2011 11:19:57 AM of 156431
September 2, 2011
U.S. securities regulators say something “troubling in the marketplace” is behind their unusual request for high-frequency trading firms to divulge details of their trading strategies, and in some cases, secret computer codes. So reports Reuters.
Most of the requests for proprietary code and algorithm parameters by the Financial Industry Regulatory Authority are going to hedge funds that use quantitative trading strategies.
The agency isn’t on “a fishing expedition or educational exercise… there's something that's troubling us in the marketplace,” says Tom Gira, executive v.p. of FINRA's market regulation unit.
The Securities and Exchange Commission is also seeking proprietary algorithmic trading data, according to agency officials and outside lawyers. The SEC requests are not necessarily related to suspicions of specific wrongdoing, but such examinations are often prompted by a tip, complaint or referral.
While the information gathered by the SEC is likely to be used in developing new structural rules for the electronic market, FINRA's efforts appear more directed at uncovering wrongdoing. SEC examiners want to ensure that hedge funds are using the strategies they market to investors and that algorithms aren’t being used to manipulate the market, Reuters reports.
Gira says, for example, that an unusual flood of orders for a lightly traded stock could lead to a request for more information.
Meanwhile, attorneys, traders, industry executives and regulators tell Reuters that the requests for algorithm code and other computerized trading strategies are up considerably this year and are focused on brokerages and hedge funds.
The SEC started seeking proprietary algorithmic trading data more than a year ago and such requests are now more broadly included in the agency’s risk-based exams, says Carlo di Florio, who heads up the agency's Office of Compliance, Inspections and Examinations.
Some lawyers and industry sources say the SEC has asked for the computer code itself, but di Florio says such requests are “very rare.” He says the SEC usually requests research reports containing sensitive information about trading strategies and proprietary formulas, Reuters reports.
In many cases, the intellectual property in question was developed over years and at great expense. There are fears among investment managers that in the long term, the agencies might not be able to guarantee confidentiality, particularly when SEC and FINRA examiners move to the private sector.
One executive of a high-frequency trading firm tells Reuters he would be “disappointed and upset” if he received a demand for code. “I mean, are these people all going to work at the SEC forever?” |
