High frequency trading inquiry

August 6, 2014 05:26 AM

Bats Global Markets Inc. is in negotiations with U.S. regulators to settle accusations that Direct Edge, the stock exchange operator it bought in January, gave unfair advantages to high-frequency traders, according to a person familiar with the matter.

The settlement talks follow a U.S. Securities and Exchange Commission inquiry begun more than two years ago into key facets of modern markets, including order types -- or instructions for handling transactions that traders can send to exchanges. Critics including Haim Bodek, a former Goldman Sachs Group Inc. trader, allege that the fastest traders use the dozens of order types available at exchanges to disadvantage other investors.

Jim Gorman, a spokesman for Lenexa, Kansas-based Bats, declined to comment, as did SEC spokesman John Nester. The discussions between Bats and the SEC were reported first yesterday by the Wall Street Journal.

The negotiations are taking place two weeks after Bats announced that Bill O’Brien, who was Direct Edge’s chief executive officer, was leaving the company. His five months as president of Bats included an appearance debating author Michael Lewis and IEX Group Inc.’s Brad Katsuyama on CNBC. Lewis’s book, “Flash Boys,” dubbed Katsuyama a hero for combating alleged unfairness in trading and accused exchanges and high-speed traders of rigging the stock market.

“Shame on both of you,” O’Brien said during the interview, addressing Lewis and Katsuyama. Their heated exchange captivated Wall Street. Later that week, Bats was forced to correct something O’Brien said about the speed of his company’s technology systems.

SEC Review

In February 2012, a top SEC official said the regulator was examining the fairness of many hallmarks of modern trading, including services exchanges offer traders. The current negotiations with Bats are tied to that review, according to the person familiar with the matter, who asked to not be identified because the talks are private.

SEC Chairman Mary Jo White said during a June 5 speech that order types can prompt broker-dealers to put their own interests ahead of those of their clients.

“Another source of broker conflicts is the large number of complex order types offered by the exchanges,” she said. “I am asking the exchanges to conduct a comprehensive review of their order types and how they operate in practice. As part of this review, I expect that the exchanges will consider appropriate rule changes to help clarify the nature of their order types and how they interact with each other, and how they support fair, orderly and efficient markets.”

NYSE’s Action

Even the CEO of Intercontinental Exchange Inc., which acquired the New York Stock Exchange in November, has complained about the proliferation of order types on U.S. markets. During a May 8 conference call with analysts, he said NYSE would pare back order types, and he called on his rivals to “adopt a moratorium” on creating new order types.

In a “first step toward making our markets less complex, we will voluntarily reduce the number of order types at our U.S. equity exchanges,” ICE CEO Jeff Sprecher said. “We will continue to evaluate our other order types to identify those that may not be providing the market with true utility.”

About the Author