Examiners at the US Securities and Exchange Commission (SEC), who specialise in investigating computerised trading strategies, have started sharing their expertise with the Federal Bureau of Investigation (FBI). An SEC spokesman has confirmed that representatives from the FBI, as well as other regulatory agencies, have met with members of the SEC’s quantitative analytics unit in recent months to improve its ability to investigate suspicious activity in algorithmic trading.
The SEC unit, which was set up in 2011, is investigating possible abuses that may have developed from the emergence of high-frequency trading (HFT) firms and the use of so-called ‘dark pools’ of liquidity or off-exchange trading methods, which can be used to manipulate the market by flooding it with quotes and are outside the scope of traditional policing.
The SEC stepped up its scrutiny of algorithmic trading following Wall Street’s infamous ‘flash crash’ of 6 May 2010 when the Dow Jones index plunged 700 points in a few minutes before rebounding to regain most of the loss.
“Our quantitative analytics unit consists of specialised examiners with PhDs and extensive backgrounds in mathematics, physics, and computer science,” said SEC spokesman Kevin Callahan. “They play a key role in examinations of the most sophisticated algorithmic trading firms and other investment advisers. The unit shares its expertise in this area with other regulatory agencies and participates in conferences to increase the dialogue with financial firms and other regulators.”
The FBI and SEC have successfully collaborated in other areas since late 2009, resulting in more than 80 prosecutions of insider trading over the period.
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