The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: High-Frequency Trading

  • From Vol. 9 No.2 (Jan. 14, 2016)

    Managing the Machine: How Hedge Fund Managers Can Monitor and Review Their Automated Trading Strategies (Part Two of Two)

    Although many hedge fund managers and other firms using automated trading (AT) strategies have relied on generic policies to comply with applicable regulations, with the advent of initiatives such as the CFTC’s Notice of Proposed Rulemaking on Regulation Automated Trading (Regulation AT) and restrictions on AT strategies imposed by MiFID II, that reliance will no longer be satisfactory. Rather, under Regulation AT and other guidance from self-regulatory and industry organizations, firms that use AT strategies must establish specific policies and controls to mitigate the particular risks associated with those strategies. In this two-part guest series, Douglas A. Rappaport, Patrick M. Mott and Elizabeth C. Rosen of Akin Gump outline five high-level first steps for legal and compliance professionals to jumpstart the process of designing and implementing a control framework tailored to a hedge fund manager’s particular AT program that will stand up to regulatory scrutiny. This second article explores the final three steps, addressing protocols for monitoring and reviewing trading activity, code and disclosures. The first article covered the first two steps, including conducting a risk assessment of and documenting the AT system. For additional insight from Rappaport, see “Perils Across the Pond: Understanding the Differences Between U.S. and U.K. Insider Trading Regulation” (Nov. 9, 2012). For insight from other Akin Gump partners, see “Non-U.S. Enforcement, Insider Trading in Futures, Failure to Supervise Charges and Other Evolving Insider Trading Challenges for Hedge Fund Managers” (Nov. 21, 2013).

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  • From Vol. 9 No.1 (Jan. 7, 2016)

    Managing the Machine: How Hedge Fund Managers Can Examine and Document Their Automated Trading Strategies (Part One of Two)

    Financial regulators are urging firms to implement policies and controls to prevent their automated trading (AT) strategies from disrupting the markets. To wit: the CFTC recently proposed risk controls and other restrictions for certain market participants that use algorithmic trading systems. European firms will soon be subjected to similar restrictions for their algorithmic trading systems in all markets covered by MiFID II, including the equities markets. FINRA and several industry organizations have begun to fill in the gaps on the U.S. equities side by issuing detailed guidance covering everything from pre-trade controls to system documentation procedures. Consequently, all firms that use AT strategies must begin establishing policies and controls to mitigate risks associated with those strategies. In this two-part guest series, Douglas A. Rappaport, Patrick M. Mott and Elizabeth C. Rosen of Akin Gump outline five high-level first steps for legal and compliance professionals to jumpstart the process of designing and implementing a control framework tailored to a hedge fund manager’s particular AT program that will stand up to regulatory scrutiny. This article will cover the first two steps, including conducting a risk assessment of and documenting the AT system. The second article will explore the remaining steps, addressing protocols for monitoring and reviewing trading activity, code and disclosures. For additional insight from Rappaport, see “How Can Hedge Fund Managers Understand and Navigate the Perils of Insider Trading Regulation and Enforcement in Hong Kong and the People’s Republic of China?” (Mar. 28, 2013). For insight from other Akin Gump partners, see “Non-E.U. Hedge Fund Managers May Not Be Required to Comply With AIFMD’s Capital and Insurance Requirements” (Jul. 9, 2015); and “Structuring Private Funds to Profit From the Oil Price Decline: Due Diligence, Liquidity Management and Investment Options” (Mar. 19, 2015).

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  • From Vol. 7 No.47 (Dec. 18, 2014)

    Regulators from the SEC, CFTC and New York Attorney General’s Office Reveal Top Hedge Fund Enforcement Priorities (Part Two of Four)

    This is the second article in a four-part series covering this year’s edition of Practising Law Institute’s annual hedge fund enforcement event.  Participants at the event included regulators from the SEC, CFTC and New York Attorney General’s Office.  This article addresses CFTC enforcement concerns and cases, New York Attorney General’s Office initiatives and defense strategies for avoiding and managing government investigations.  The first article in this series discussed key points made by Julie M. Riewe, Co-Chief of the SEC’s Asset Management Unit, on enforcement trends, principal transactions, conflicts raised by side-by-side management, valuation, allocation of expenses and the potential deterrent value of smaller enforcement actions.  The third article in the series will focus on SEC inspections and examinations.  And the final article will provide instruction (based on points made at the PLI event) on how to establish an effective private fund compliance program.  See also “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).

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  • From Vol. 7 No.16 (Apr. 25, 2014)

    When Must a Hedge Fund Manager (or Its Current or Former Employees) Preserve Evidence in Litigation or Potential Litigation Involving High-Frequency Trading Code?

    Software is playing an increasingly central role in the investment processes of hedge funds, high frequency traders and other market participants.  Most of the growing body of law around trading software focuses on who owns it, when it has been stolen and the remedies for theft.  See “Recent Developments Affecting the Protection of Trade Secrets by Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).  There is less law, and less commentary, on the application of civil procedure to trading technology disputes.  Accordingly, a recent federal court decision is uniquely interesting to hedge fund managers and others that create and own trading technology; to technology and investment professionals that leave one shop to start another; and to lawyers and others professionally focused on intellectual property issues.  A technology-based trading firm asked the court to impose spoliation sanctions on former employees who allegedly stole code from the firm, incorporated versions of that code into the trading technology of a new firm then – while aware of litigation involving the code – destroyed or erased various iterations of the code.  In a carefully drafted opinion, the court applied the law of spoliation to this dispute involving trading software code.  The court’s opinion provides valuable guidance as to when, and to what extent, a duty to preserve electronic information pertaining to proprietary software exists and the criteria for imposing an appropriate sanction for spoliation.

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  • From Vol. 5 No.17 (Apr. 26, 2012)

    Recent CFTC Settlement Highlights Regulatory Focus on Manipulation of Commodity Futures and High Frequency Trading

    On April 19, 2012, Chief Judge Loretta Preska of the U.S. District Court for the Southern District of New York approved a consent order detailing a settlement entered into among the U.S. Commodity Futures Trading Commission (CFTC), high frequency global proprietary trading firm Optiver Holding BV, two of its subsidiaries (collectively, Optiver) and three individual principals.  The settling parties were accused of manipulating the market for light sweet crude oil, New York harbor heating oil and New York harbor gasoline futures contracts.  This settlement demonstrates a renewed government emphasis on stamping out market manipulation in these markets.  While Optiver is a proprietary trading firm that utilizes high frequency algorithmic trading, as opposed to a hedge fund manager, the legal points raised by the action apply with equal force to hedge fund managers that trade commodity futures or that employ high frequency strategies.  For a discussion of a CFTC action brought against a hedge fund trader, see “Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts,” The Hedge Fund Law Report, Vol. 4, No. 30 (Sep. 1, 2011).  This article describes the complaint initially brought by the CFTC in 2008, the terms of the settlement and the stiff sanctions imposed on the defendants, including disgorgement, civil monetary penalties, trading restrictions imposed on Optiver and statutory bars imposed on each of the individual defendants.

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  • From Vol. 2 No.44 (Nov. 5, 2009)

    U.S. Senate Subcommittee on Securities, Insurance and Investment Holds Hearing on Dark Pools, Flash Orders, High Frequency Trading and Market Surveillance

    Dark pools, flash orders and high frequency trading have received significant regulatory attention of late.  On October 21, 2009, the SEC proposed rule changes regarding dark pools.  Dark pools are electronic networks that facilitate trading of shares outside of traditional exchanges and give certain investors the ability to trade large blocks of shares without notifying the entire market of the transaction.  The proposed rules would require a greater proportion of stock quotes to be displayed and would restrict communication between dark pools.  The overall goal of the proposed rule changes is to push more orders onto publicly displayed markets.  The SEC also has recently proposed a ban on flash orders, a practice in which certain investors are privy to a quote for a short time before others can view that quote.  See “What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?,” The Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).  Finally, high frequency trading has been receiving significant attention of late, both from regulators and the press, broadly focusing on the question of whether the practice unfairly privileges traders with access to co-located computers on or near exchanges.  See “Does Europe Offer a More Hospitable Regulatory Environment for High Frequency Trading Than the United States?,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).  The recent regulatory attention on these topics was the backdrop for a hearing on October 28, 2009 hosted by the U.S. Senate Subcommittee on Securities, Insurance and Investment.  At the hearing, the Subcommittee heard testimony from regulators, industry participants and a fellow senator on, broadly, whether the current regulatory structure is up to the task of regulating the innovative, fast-evolving topics of dark pools, flash orders and high frequency trading.  The Hedge Fund Law Report attended the hearing, and this article summarizes the points discussed at the hearing of most pressing relevance for hedge funds.  Specifically, we offer significant detail on what was said, and what the tone and substance of the hearings may mean for regulatory developments in the near term with respect to dark pools, flash orders, high frequency trading and market surveillance.

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  • From Vol. 2 No.39 (Oct. 1, 2009)

    Does Europe Offer a More Hospitable Regulatory Environment for High Frequency Trading Than the United States?

    High frequency trading now accounts for the majority of all U.S. equity trades, and by most accounts has dramatically increased liquidity in a variety of markets.  Nonetheless, largely based on a conflation of high frequency trading and flash orders – practices that are related, but different in key ways – high frequency trading has received quite a bit of negative press of late.  On flash orders, see “What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?,” The Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).  One frequently adduced argument is unfairness: high frequency traders are said to have access to potent computers and powerful human resources, while lesser traders do not.  This may be true, but it’s not illegal (at least not yet).  Moreover, it is difficult to identify any reason why this would be less than ethical, or materially different from the informational asymmetries that have characterized trading markets at least since a group of brokers formed the New York Stock Exchange under a buttonwood tree on Wall Street in 1792.  High frequency trading remains a viable investment approach, and securities investing has incontrovertibly become a global business.  Accordingly, this article explores whether Europe offers a more hospitable regulatory environment for high frequency trading and high frequency traders than does the U.S.  It also addresses the practical and technological variations among the two jurisdictions.  The purpose of this article is to help hedge funds with a high frequency trading strategy answer the question: If I’m going to do this, where should I set up shop?  Or if I’ve already set up shop, what are the regulatory considerations of which I should be aware, and how may they change?  Most importantly, how will these regulatory considerations affect my trading profits and opportunities and my investments in technology and other resources?  In particular, this article examines what high frequency trading is, including how it interacts with flash orders, dark pools and multilateral trading facilities; the upsides and downsides of high frequency trading from the perspectives of hedge funds and regulators; regulation of high frequency trading in the U.S. and Europe; and the relative benefits and burdens (practical and regulatory) of the trading environments in both places.

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