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Something is Troubling the Regulators in the Marketplace? Really?

02

September, 2011

According to this Reuters article by Sarah Lynch and Jonathon Spicer, US securities regulators are asking HFT’s to hand over their secret sauce! As in code. Predatory algo code. Tom Gira of FINRA stated, “It’s not a fishing expedition or educational exercise. It’s because there’s something that’s troubling us in the marketplace.”

The SEC has also been making requests, according to the article, although not really for the secret sauce… actually for white papers (whatever that means). What strikes me is that we have multiple regulators. Some are government entities, and some are for-profit, like FINRA, who is requesting the secret sauce. Now this is just thinking out loud, but FINRA is for-profit, and its fastest growing revenue segment is exchanges, who subcontract out their regulatory function to them. The exchanges’s best friends are large HFT’s (Think the DMM’s like Getco perhaps). So is FINRA making these code requests from the best friends of their largest customers? Or is FINRA making these requests of smaller less-regulated hedge fund high frequency shops, and helping the larger HFT friends of their customer base in the process? Guess what we think!

In another direction, we love this part of the article: an HFT executive who requested anonymity said, “I’d be disappointed and upset if they asked for code. I mean, are these people all going to work at the SEC forever?”

Bingo! At least we have an admission here of the rampant Regulatory Capture (where HFT’s and industry players hire away SEC staff for big bucks, to leverage their SEC relationships and SEC-specific knowledge), and from one of the high frequency trading firms no less. They know the game and joke that our industry has become.

Remember Silver Lake Partners? We wrote about their role in a Themis May 31st thoughts piece.
Back then their executive, Mike Bingle, had this to say about the maturing HFT space in his comments the the FT’s Jeremy Grant: “This business is maturing; it’s an incredibly competitive market today. To be successful in all seasons you need to operate on a global basis and to have relationships with all the major market centers, as well as the regulators. It’s a big business today and it’s the type of thing that favors scale.” And obviously rule making access!

So first of all, we are finally thankful that the regulators are at least recognizing that there is something rotten in Denmark. Secondly we take notice that a huge portion of the regulatory policing is done by for-profit entities; we can only hope that their motives are for what’s good for the marketplace, and not its revenue base. Lastly, we are thankful that folks are waking up that rules are being made not on the basis of what is fair, or what is good for capital formation, or what is good for economic growth, but rather on the basis of influence purchased through employment offers and corporate strategies.

Nice article. Happy Labor Day, everybody. And hug an out of work financial executive this weekend!

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