With the continued brouhaha surrounding high-frequency trading and the recently released book “Flash Boys,”Traders spoke with Thomas Gorman, an attorney with Dorsey & Whitney, and what he thought of the ongoing controversy and whether the market can expect more regulatory rulemaking in that area.
Traders: Do you think the issues brought up in the book could result in some new rules for traders?
Gorman: The book and the issues it raises are certainly getting a lot of attention. But high-speed or high-frequency trading has been around for quite a while, it’s been dominating the markets for quite a while, and people have been talking about it for quite a while. However, I think the book has crystalized it in a way that hasn’t been done before, and fleshed out some of the issues surrounding high-speed trading that have been bouncing around for quite a while.
That said, writing a regulation is much more complicated than it sounds. High-speed trading isn’t just one thing-there are multiple questions, practices and issues there. So you have to break down what practices you are actually talking about.
Traders:What practices could see regulation?
Gorman: Lewis talks about traders who move their computers closer to the server they want to trade off of, with the idea that if you get yourself closer you’ll get yourself a bit of an edge there.
That’s something, that if the SEC wanted to address, it would be relatively simple to do. Since the SEC regulates the exchanges, they could write a simple rule that says, you have to put up a filter or whatever other product to make sure everybody gets access at the same time, no matter where they are located.
Traders: Could the SEC approach other perceived problems with a similar simple solution?
Gorman: They could, but it depends on how you think of those practices. For example, the front-running charge that Lewis brings up depends on what you think front-running is.
If, in fact, a high-speed trader is able to come into a dozen stocks on the New York Stock Exchange, see the orders, and because of his speed, execute quicker-then that’s not really front-running, it’s just a technological advantage.
One thing we try to make clear about the markets is that everybody is supposed to have a level playing field-but the other side of the level playing field is that everybody is encouraged to look for an edge, to get better research, better information, and better execution. So, if all you’re doing is getting split-second better execution, I think it becomes a real fundamental question of whether you want to regulate that.
Traders:What about another issue that comes up in this debate, that of some traders getting an advanced look at some trading or economic data?
Gorman: That’s what the New York Attorney General is calling “Insider Trading 2.0” … but it’s not insider trading really, because insider trading involves fraud or deception of some sort. There, all you’re doing is buying yourself access to better information, and under existing insider trading rules, that’s not insider trading.
It may or may not be fair, depending on your view, but it’s not insider trading. The SEC could look at that, but traditionally, the SEC doesn’t regulate fairness.
Thomas O. Gorman is a partner at the law firm Dorsey & Whitney, specializing in corporate defense. He also writes SEC Actions, a blog that covers the enforcement activities of the Securities and Exchange Commission and other regulators.
The views represented in this commentary are those of its author and do not reflect the opinion of Traders or its staff. Traders welcomes reader feedback on this column and on all issues relevant to the institutional trading community. Please send your comments to Traderseditorial@sourcemedia.com.
