Wash Trading by High-Frequency Firms Said to Face U.S. Scrutiny

Reuters/Brendan McDermid

Bloomberg News – By Joshua Gallu and Silla Brush – June 22, 2012

High-frequency trading firms are drawing scrutiny from U.S. regulators seeking evidence that they may be distorting market prices by conducting transactions with themselves, said two people with knowledge of the matter.

So-called wash trades, in which a party buys a contract from itself, could be executed inadvertently by firms with multiple algorithms active in the same stock or derivative, said the people, who requested anonymity because the review isn’t public. Such trades, which can alter the price of shares if they are executed above or below market rates, would be illegal if deemed intentional efforts to manipulate stocks.

The Securities and Exchange Commission and Commodity Futures Trading Commission have sharpened their focus on high-frequency and algorithmic trading since May 6, 2010, when about $862 billion was erased from stock values in 20 minutes before share prices recovered from the plunge. Regulators have expressed concern that some firms and electronic exchanges don’t have sufficient controls to prevent a range of events from improper trades to programming glitches that could roil markets even when there is no wrongdoing.

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