SEC Crisis Response Criticized In Compelling Law Review Article

June 10, 2016

Today's Blog is an appeal to all serious Wall Street professionals and public customers: I want you to make some time to read a law review article. Yeah, I know, that's all sooooooooo old school to have to sit down and manually read 68-pages of prose with this snore of a title: "Note: High Frequency Litigation: SEC responses to high frequency trading as a case study in misplaced regulatory priorities"(The Columbia Science & Technology Law Review; Author Nathaniel E. Sokol, Vol. XVII, Spring 2016 at For those of you seeking a decent primer on HFT -- how it works, how it disrupts, how it harms the markets, and how it could be regulated -- I commend you to this short 2014 video:

Why is the arch cynic, curmudgeon, and perpetually dyspeptic industry gadfly Bill Singer recommending the Sokol law reivew note? If nothing else, Sokol's analysis is compelling, thoughtful, comprehensive and provocative. Additionally, Sokol and I are clearly kindred spirits as evidenced by the concluding paragraph of his law review Note: 

In a world of limited resources, however, the Commission must transition away from its pattern of regulatory crisis response. It cannot afford to prioritize enforcement as a strategy to confront market developments like HFT, but must instead aim to take them in stride as part of a system that fosters constant examination and enhancement of market design. The SEC has more sophisticated regulatory levers, better technology, and a greater ability to engage with industry and private research leaders than ever before. It must remember the wisdom of those Commissioners who first envisioned the NMS, and reshape the agency to better advance a healthier, and more robust securities market. In the long run, this shift will prove more effective than the myopic punitive action that is currently the central SEC strategy.

Now that's a writer who writes my language!

If you will invest the time necessary to read Sokol's article, you will come away with a much better understanding of the HFT landscape and the various attempts to subject it to a regultory regimen.  As Sokol makes clear in his preamble to the Note:

In 1975, Congress amended the Securities and Exchange Act of 1934, calling for the establishment of a National Market System ("NMS"). The NMS rests on the philosophy that fostering competition between private actors through smart regulation can produce stronger markets and greater innovation than dictatorial mandates and aggressive enforcement. 

Advances toward this goal have generally arrived only in response to major crises of market confidence or jumps in market technology that critically distort the competitive horizon. Regulators often over-prioritize enforcement against individual bad actors to rein in excesses which they are unequipped to understand or deter. 

This Note employs High Frequency Trading ("HFT") as a case study of this misplaced regulatory priority. It examines the rise of HFT, the economics behind its profitability, the controversies it has spawned and the reactions it has elicited from the SEC and its agency peers. 

Next, this Note highlights how relevant enforcement actions brought by the SEC have only peripherally related to the high frequency nature of the target firms or trading strategies, and have failed to address any of the broader concerns raised by market participants regarding HFT's impact. The Note evaluates many of the alternative regulation-based levers the SEC has available, and suggests changes in both the culture and operation of the agency. 

In conclusion, do me a favor, read the damn law review Note. It's quite the display of academic agility and for those of us in the biz who grapple with HFT daily, it's a refreshing consideration of how regulation needs (but too often fails) to adapt to the fast-paced and ever-changing nature of the markets.  
In 2013, I interviewed Shah Gilani, author of Wall Street Insights and Indictments newsletter, about the then existing problems with HFT and the growing concerns about ineffective regulation. Three years later, as evidenced by Sokol's Note, the same HFT issues that Gilani and I wrestled with have not been effectively addressed by Wall Street's cops. WATCH HFT INTERVIEW