High-Frequency Traders Have a Low Opinion of SEC Employees

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Trader's rendering of a SEC investigator. Photo: iStockphoto

Reuters reports that the Financial Industry Regulatory Authority and the Securities Exchange Commission have started looking into the strategies employed by high-frequency trading firms. FINRA, which reports to the SEC, says its investigation is the result of market activity: "It's not a fishing expedition or educational exercise. It's because there's something that's troubling us in the marketplace," said Tom Gira, executive vice-president of FINRA's market regulation unit.

The SEC claims to be more interested in general compliance with U.S. regulations, and has made the unusual move of asking firms for information specifically related to the closely guarded computer strategies and algorithms they use to make trades. Unsurprisingly, the traders don't like this one bit, especially because the SEC employs industry experts who could possibly take private-sector jobs in the future:


It has alarmed some traders who are afraid their "secret sauce" — intellectual property sometimes developed over years and at great cost — could get into the wrong hands ... "I'd be disappointed and upset" if they asked for code, said a high-frequency trading firm executive who declined to be named. "I mean, are these people all going to work at the SEC forever?"

Meanwhile, Carlo di Florio, head of the SEC's Office of Compliance, Inspections and Examination, called requests for the codes themselves "very rare," and said investigators are mostly asking for research papers about "trade reasoning and proprietary formulas." He added that there are agency policies (not to mention criminal laws) in place to prevent employees from stealing information they could eventually use to their advantage. Still, according to one firm's lawyer, there are "lingering concerns that a staffer might remember something he saw in an exam and use it down the road."

Some think that firms shouldn't be so concerned about investigators storing information in their brains, as they are inferior to the brains of people who work for high-frequency trading firms. One unnamed trader told Reuters that, even if SEC employees managed to get a hold of the codes, they wouldn't know what they were looking at: "Let's just say the good developers in the industry are being hired by the industry — not by an SEC salary."

SEC investigators: Expert thieves, dumb thieves, people just doing their jobs, or some combination of the three? Only time will tell! While they wait to find out, executives might want to make sure they have an explanation for that aforementioned "troubling" market activity.

Exclusive: Regulators seek trading secrets [Reuters]