Momentum Ignition

One of the favourite techniques of the HFT algos is “momentum ignition.” The idea is to start a stock or index moving by a burst of purchases or sales, in the hope that others will start to chase the stock and allow the algo to profit by frontrunning the orders. Of course this is a direct violation of Section 9 of the Securities Exchange Act of 1934, viz:

2) To effect, alone or with 1 or more other persons, a series of transactions in any security registered on a national securities exchange, any security not so registered, or in connection with any security-based swap or security-based swap agreement with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.

But the SEC doesn’t care – there will be nice sinecures for SEC employees at the HFT firms. The good news is that the plaintiff’s bar is beginning to realize that there is an opportunity here – the HFT firms have made a lot of money – and the civil lawsuits are starting to gain momentum – and not in a good way for the HFT thieves.

Providence claims the exchanges, the biggest brokerage firms and a group of high-speed trading firms allowed some traders to gain access to non-public data about investors’ trades. The scheme allegedly included electronic front-running, in which high-frequency traders learned of bids and offers, made transactions at better prices and then profited from the investors that made the original orders.

Providence named as defendants 14 brokerages, 16 securities exchanges and 12 high-speed traders.

“Public investors are entitled to be treated fairly and honestly by brokers and exchanges,” Providence said in its complaint. “In addition to destroying trust in the U.S. capital markets, the misconduct alleged herein has siphoned off billions of dollars from private and public pension funds and individual retirement accounts that millions of Americans depend on.”

Michael Lewis appears to have woken up at least a few of the victims. Hopefully the sharks will draw blood and this will turn into a feeding frenzy.

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