FSA slaps heavy fine on high frequency trading boutiques

UK regulator the Financial Services Authority has for the first time clamped down on a high-frequency trading firm and the brokers that handle their trades by slapping heavy fines on three of Europe’s main electronic trading houses.



The FSA today fined high-frequency trading firm Getco £1.4m (€1.6m) as well as investment bank Credit Suisse £1.75m and agency broker Instinet Europe £1.05m for “multiple breaches that resulted in failures to provide transaction reports promptly and correctly to the FSA”.

The trading fines are punitive by historical standards and in combination (£4.2m) almost double the value of fines issued so far this year by the UK regulator (£4.7m).

The only investment banks to have warranted stronger sanctions in the past year were Toronto Dominion, which was fined £7m in December last year, Barclays Capital, which was hit to the tune of £2.45m in August last year, Morgan Stanley, which incurred £1.4m in May.

Alexander Justham, the director of markets at the FSA, said: “Firms must meet their obligation to provide accurate and timely data. Without quality data we cannot properly detect and investigate market abuse, identify market wide risks or have a comprehensive understanding of the activities of each firm.”

He added: “The standard of regulatory reporting by these firms fell far short of what the FSA expects and requires.”

The fine for Getco is the first time a high-frequency trading firm has been punished by the UK regulator and comes amid growing concern about the impact these trading boutiques have on the integrity of the European equity market.

UK financial services minister Lord Myners said in November last year: “The danger is that nobody really seems to think of themselves as owners.”

High frequency traders, which generate huge volumes of trades that take advantage of tiny price discrepancies, are expected to almost double their European market share to 45% in 2012, from their current level of 25%, according to a report released last week by consultancy Aite Group.

Rival traders have defended them, arguing they provide much-needed liquidity.

Chris Jackson, the head of Emea execution sales at Citigroup, said last month: “Many take the view that high-frequency trading brings some benefits to the market. They point out that liquidity and diverse alpha expectations are essential for effective price formation and the high-frequency traders provide both of these.”

But John Edge, a director at consultancy Redkite Financial Markets, said: “It is clear from recent activity, that the FSA has established a team with a strong understanding of today’s market dynamics. Further it is looking to ensure that market participants, including high-frequency traders, implement appropriate systems and controls by financially penalising those that fall short.”

Getco said in a statement: "We are pleased to have reached a resolution with the FSA and to put this matter behind us. Primarily this error was due to a failure in the procedures of an external third-party on which Getco Europe relied with regard to reporting London Stock Exchange transactions. While the third party assured us that the transactions were being reported properly, it was our responsibility to ensure that was in fact the case.

It is important to note that all of the relevant trades were completed on behalf of our firm, took place on the public order book of a regulated market and were transparent and visible to the public markets at the time of execution. Therefore, no investors or other market participants were impacted in any way.

We cooperated fully with the FSA during the course of its review and have taken the appropriate actions to ensure that this type of error does not occur again."

A spokeswoman for Credit Suisse said: "We deeply regret the breach in our transaction reporting obligations. We fully cooperated with the FSA and are pleased to put this matter behind us."

Instinet declined to comment.


http://www.efinancialnews.com/story/2010-04-08/fsa-fines-instinet-getco-and-credit-suisse

 

"Crime" "pays".

 

What I get a kick out of is the "provides much needed liquidity."

 

1 million? thats a fuking joke

 

Why? My understanding is that Getco has in fact become one of the largest liquidity providers.

 

They only provide "liquidity" as a result of other people's "liquidity".

 

See below your post!

 

What do you mean? Don't they post liquidity backed by their own accounts?

 

HFT basically frontruns your order, trying to squeeze ticks out of everyone.

 

I can't see any way for someone to frontrun you on a public ECN, unless your broker is colluding and/or your trading platform is horribly buggy.

As far as I can tell, Getco and similar firms really do provide a tremendous amount of liquidity, and much more efficiently and cheaply than did their predecessors.

Flash, internalization, and payment for order flow are all bad, but they're not the same thing as frontrunning -- and, IMO, internalization is by far the worst of the bunch, yet never gets much coverage. And only the customer's own broker can internalize, which of course excludes all pure HFT shops.

http://www.tradersmagazine.com/issues/20_304/nasdaq-internalization-dark-pools-105375-1.html