The SEC has charged a small firm, Athena Capital Research, with using rapid-fire trades in the final seconds of the trading day to manipulate the closing prices in some NASDAQ-listed stocks.
The SEC alleges Athena used an algorithm called Gravy to "mark the close." It traded on the order imbalances that occur at the end of the day. When there is an imbalance between buyers and sellers, NASDAQ routinely runs an auction to fill the order imbalances at the best price at the close. Athena, the SEC says, placed orders to fill imbalances, then traded shares on the market prior to the close on the opposite side of the order.
The trading occurred in a short period from June to December 2009.
While the firm is small and the fine of $1 million is not much, I think it is important symbolically.
I've been waiting for the SEC or NY Attorney General Eric Schneiderman to announce a case against a HFT for years. This is the first HFT manipulation case the SEC has brought.
The problem is, it's very difficult to get access to the information to prove that something "abusive" or "manipulative" occurred, which is the legal standard.
In this case, they were aided by email from the firm, which boasted that they were "owning the game."
For its part, Athena said, "While Athena does not deny the Commission's charges, Athena believes that its trading activity helped satisfy market demand for liquidity during a period of unprecedented demand for such liquidity. "
I've had no doubt that there is a small group that is engaging in some kind of abusive and manipulative behavior, and I'm glad they caught someone. More importantly, it shows they are finally getting access to data that enables them to catch the bad guys. Good for them.
How big a problem is this? I don't know, but I seriously doubt bigger players would ever engage in this kind of behavior. Still, it's good the SEC is being vigilant.