Friday, April 13, 2012

hide not slide...,

WSJ | U.S. securities regulators are conducting a wide-ranging investigation into the complex relationships between rapid-fire trading firms and stock exchanges, according to the official overseeing some 20 probes into computerized trading.

The inquiry into ownership and other ties is part of a broader probe into whether high-speed traders have unfair advantages over other investors, according to people familiar with the matter.

"We're interested in understanding the ownership structure and history" of the firms, said Daniel Hawke, head of the Securities and Exchange Commission's market abuse enforcement unit, in an interview. "How the firm got started, who was behind it and who wrote the [computer] code that might be at issue."

One such area under SEC scrutiny is the use of routing and trading instructions, known as order types. Many investors use relatively simple order types, such as limit orders, which specify a price at which an investor is willing to buy or sell a stock.

But exchanges also offer more sophisticated order types commonly used by rapid-fire traders that could potentially give them an edge over other investors, according to industry experts. Some allow computer-driven traders to hide orders and prevent them from routing to other exchanges, where the traders may have less control over the order execution.

One order type, called "Hide Not Slide" and offered by the exchange operator Direct Edge Holdings LLC, is among those being scrutinized by the SEC, according to people familiar with the matter. The agency is also looking at a similar order type offered by computerized stock exchange BATS Global Markets Inc., the people said.

Other exchanges also offer order types that share similar characteristics. Representatives of Direct Edge and BATS declined to comment.

The SEC is examining whether such order types unfairly allow high-speed traders to jump ahead of other investors in an exchange's "order book," or the queue of buy and sell orders that are typically ranked by price and when they were received, according to people familiar with the matter.

Another area of focus for the SEC are the rebates some traders earn from exchanges even as other investors pay fees to complete trades, say people familiar with exchange operations and the SEC probes.

The SEC stepped up its scrutiny of these high-speed trading firms and exchanges after the May 6, 2010 "flash crash," when computerized trading triggered a 9% selloff within minutes.

Some aspects of the SEC's inquiry are tied to at least one whistleblower, according to people familiar with the matter.

One of the most prominent lines of inquiry involves BATS, which last month pulled its initial public offering after halting trading due to what it described as a software glitch. On the morning BATS shares began trading, The Wall Street Journal disclosed details of the SEC's investigation into whether superfast-trading firms have exploited their links to BATS and other exchanges to gain an unfair advantage over other investors.