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FBI joins SEC in computer trading probe

The FBI has joined securities regulators to tackle the potential threat of market manipulation posed by sophisticated computer trading strategies that have taken markets beyond the scope of traditional policing.

FBI agents have joined forces with a new unit within the Securities and Exchange Commission that examines hedge funds and other firms that are using algorithm trading strategies.

The SEC’s Quantitative Analytics Unit is looking at abuses that might arise from the emergence of high-frequency trading firms and the use of dark pool (off exchange) trading. Traders using these methods can manipulate the market by flooding it with quotes, known as quote stuffing, or placing millions of orders that are quickly cancelled, to drive others to trade in ways that benefit their position, a practice known as layering.

Some of these trading strategies have been criticised of destabilising the market and putting retail investors at a disadvantage. Their supporters have said they increase liquidity in securities and reduce volatility.

The FBI has historically investigated cases of market manipulation, but people familiar with the matter said the collaboration with the SEC was an attempt to beef up the agency’s expertise and catch up with fast-changing technology-driven trading strategies.

The move reflects market participants’ evolution from traditional investment firms into financial engineering shops. Authorities are concerned that technological advances have outpaced hedge fund compliance programmes and left the stock market vulnerable to manipulation.

“If you don’t speak the language, the specifics are already lost,” said one person involved in the collaboration.

Authorities are exploring potential holes in the system, including new algorithms referred to as “news aggregation” that search the internet, news sites and social media for selected keywords, and fire off orders in milliseconds. The trades are so quick, often before the information is widely disseminated, that authorities are debating whether they violate insider trading rules, the people familiar with the matter said.

Authorities are also monitoring alpha capture systems, platforms where sell-side firms share information with buyside professionals, for potential front running or insider trading. Also on their radar is artificial intelligence trading, an algorithm that predicts market reactions based on history.

One government official said market structure could be the next big area for cases, although it was not clear whether any of the strategies violated criminal laws. To prove a criminal case, the FBI would need to show that the trader intended to manipulate the stock, which could prove more difficult for strategies that are triggered by computers.

The SEC has brought a handful of cases involving these strategies and other investigations. No criminal case is on the horizon, one of the people said.

The FBI and SEC have successfully worked together in other areas, with their collaboration resulting in more than 80 prosecutions of insider trading over the past three and a half years.

Article source - http://www.ft.com/cms/s/0/11b81d74-85a4-11e2-9ee3-00144feabdc0.html#axzz2MjRQO0Gw

Comments

  1. chuck steaks says:

    hoos about da fbi go an find obamas budsters dat r threatening us citizens! talk about sndin a drone over da capital, or shott it douns, wi.l bring da feds to u r door. yet its oks to threaten mes an mies felo komentitsa/tors citizens of da net cloud?? so noes da feds wanna stop meis frum makin bak alls da monies i bin loozin since da ,maroon took over [2008] to tday. well; screwestewr dems, an snd dem,s to da retrainin kampos out her in nys. da crock>sucker>dikheds. git oda mis life, an go tak dacongress,senate liberals to da kamps.

  2. Rasesh Shukla - India says:

    friends, no meaning of any such investigation, as every thing will be over, when thay can find any manipulations.

    Who belive that manipulation is not involved in any financial market? only regulatory bodies just dont know about this i think, and thay will aware when every thing will be finished. "To lock the stable" just and only after horce run away, is a quite old and all time favourite game world wide.

    Manipulation is a synoname of financial markets, never expect for manipulation free market........

  3. stoner says:

    Yes, check them out especially all these no lifers who build up the stock price and make millions
    and promote it like no tomorrow.Then the bottom falls out and you are left with saw dust. A stock recently selling for .23cents was driven up to $6.36 in less than six months with high volume and then the bottom fell out. You could not get out if you tried. They were a bunch of )(*&^%$#@+ and not worthy of a pinch of salt. They made millions while the individual who had his savings in lost everything.They promote the stock and provide incorrect data and wrong information to drive up while making big profits.These are the individuals who should be put in prison and not let out until they pay the losers on the stock in question.Investigate them to the fullest. Take it to them SEC.

  4. RSRAND says:

    This is exactly about enforcing the LAW. You canot allow these people to perpetrate frauds unregulate without fear of getting caught. It's not about Government, it's about identifying LAW breakers and putting them in jail.... where they belong.

  5. Earl E says:

    Wow!, another costly investigation when I was just starting to be happyfied by the anticipated savings from sequestration. It is probably a good move since the FBI does not have a cozy relationship with potential villains. Further, if the FBI had been involved during the Bernie scam, lots of investors would still be enjoying the fruits of their labors.
    In the meantime, let's support Rand Paul (a truly awesome American) in his effort to break the pattern of mindless madness.

  6. neal weintraub says:

    OMG. Yes, tell me about the free market.
    The Refco's, and Perguines and Mann Financial.
    Tell me about the free market that bails out banks and leaves home owners with a loss of equity.
    Tell me about how government plays favorites with AIG and G.M.
    Tell me about the free market, that thanks people like me "for their service."
    But makes them go on food stamps.
    Tell about the free market where 4% of the wealthy just about this country.
    Tell me a bout the "free market" where everyday a new breach of ethics develops.
    And tell me :free market" why you lot all the big banks really go free

    • Nick Lucko says:

      We don't have a 'free market'. What we have is crony capitalism - businesses and individuals who get special privileges and legal protection because of their 'connections' and their ability to bribe politicians.

  7. JP says:

    Oh boy, it will only be a matter of time before the Gov't sticks it's nose in the free market and on the pretense of FAIRNESS and sets more regulations and takes all the Free out of the Free market. That is what Gov't does best so bend over once again everyone and grab your ankles because here comes the Uncle SAM's boot. Bye Bye Free Market Trading! For those of you who will agree and conform with the Gov't, in the words of Thomas Jefferson "I would rather be exposed to the inconveniences attending too much liberty than to those attending too small a degree of it."

    • webknight18 says:

      This isn't about liberty u moron, this is about fraud. Do u think the FBI shouldn't investigate any crimes because it violates the freedom of the criminals? What about the freedom of the people who are trying to make money on a true free market where big companies cannot manipulate the market? Get your tin foil hat off and use your damn brain for once. All regulations aren't bad.

    • Dennis King says:

      Here is some free information, I hope it does not qualify as inside info though.
      A pullback on a wave 4 consolidation to ES 1526-32 should precede the wave 5 to the high, lets say 1565 for now. Keep up the free money, Ben, until the free market demands you cannot. An FBI agent should have a field day with that.

      What is truly fraudulent is the government wasting its manpower on nitpicking rather than going after the 'Too big to jail' institutions ala Eric Holder's testimony today. Finally, he said something useful in describing the trepidation of the Justice Department.

      • Jeff Little says:

        So you don't think that financial companies front-running their customers is a problem?

        • chuck steaks says:

          well; yeah! so how do u/i maka profit frum noin it?! again , it is da corporations dat r complainin. so we ned to kep it up as long as dey complian. u noe sumthin is up wen da coprs kal in da feds. it aint goin anywers, so support bradley manning! a soldier agin sensrbtch!

      • chuck steaks says:

        NO!NO!NO! holder da coward wurks for da abomination. mak no mistake! he do not wurk 4 us citizens. he is why da feds r lokin into dis, not to hepp u/i!

  8. John Smith says:

    Finally - something interesting, accurate and worthwhile to put on your blog!

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