Thursday, January 14, 2010

SEC has proposed new rules for regulating Flash Trading

I've been following the Flash Trading controversy for some time now. If you haven't heard about Flash Trading, it's a term for using very sophisticated ultra-high-speed computer stock trading algorithms in a fashion which, some people feel, is inappropriate. Flash Trading is part of what is sometimes referred to as "High Frequency Trading", and which also includes other activities such as Naked Trading and Dark Pools (what great names!).

Here's a few links with some more thoughts on Flash Trading.

According to Reuters, recent measurements now indicate that naked high frequency trading now accounts for 38 percent of US equities trading.

Now it appears that the SEC are proposing to introduce new regulations governing the operation of such computer software. Here's their press release.

The press release is a bit confusing, and I'm not really sure that it is describing the same thing. It says, in part:

Through sponsored access, especially "unfiltered" or "naked" sponsored access arrangements, there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. In particular, there is an increased likelihood that customers will enter erroneous orders as a result of computer malfunction or human error, fail to comply with various regulatory requirements, or breach a credit or capital limit.

The SEC's proposed rule would require broker-dealers to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory and other risks related to its market access, including access on behalf of sponsored customers.

I'm mostly interested in this topic from the computer software point of view; this is clearly some extremely sophisticated software that is being used, and I'd love to learn more about how it works. It's possible to get hints about this by looking at things like job postings, but that's just a taste; it would be neat if somebody who actually knew what the software looked like would post a "architecture of a high frequency trading software system" article some day.

1 comment:

  1. I would also like to see the basic architecture of a flash trading system.

    Where do the inputs come from? Do these systems have huge amounts of instaneous data feeds coming in from electronic exchanges?

    I've read the book "The Predictors" by Thomas Bass that highlighted physics professors using chaos theory and advanced statistics to make trades. This was in the early 1990's and they formed The Prediction Company which is now owned by UBS. They used data feeds, but I don't really think of this as flash trading.

    I think of flash trading as programs that have information that isn't available to the rest of the public, like they are taking peeks at other people's orders before they execute.

    I've also heard these systems as being created by "Quants" who use sophisticated mathematics to predict markets. But, what I want to know is how does one quant operate in the same company with another quant without each one sabotaging the other's trades. For example, I've read about one system buying a bunch of stock XYZ and the other system short selling stock XYZ at the same time.