Flash This: Fraud charges for high-frequency trader

A small high-frequency trading firm settled fraud charges and paid a $1 million penalty for fraudulently manipulating stock prices in the final minutes of trading, the Securities and Exchange Commission announced Thursday.

The SEC sanctioned New York-based Athena Capital Research for placing a large number of aggressive and rapid-fire trades in the final two seconds of trading on the Nasdaq over a six-month period in 2009. The case was the first manipulation case brought by the SEC for high-frequency trading.

High-frequency trading involves automated high-speed computer trading that relies on computer algorithms to buy or sell large volumes of orders in milliseconds. These traders are located geographically closer to exchanges and use both proximity and technology to speed past ordinary traders.

This trading practice came under fire earlier this year in Flash Boys, a best-selling book by noted author Michael Lewis. He documented how the these traders allegedly drive up prices and suck profits away from retirement investments held by average folks.

In the SEC case, Athena Capital Research reportedly used an algorithm called Gravy to affect the closing price of stocks, overwhelming the markets available orders in the final seconds, pushing up prices.

The practice of trading in the final seconds is called “marking the close,” and the SEC charged that Athena Capital Research was well aware of its price impact, bragging in internal emails that it was “owning the game.”

“Traders today can certainly use complex algorithms and take advantage of cutting-edge technology, but what happened here was fraud,” Andrew J. Ceresney, director of the SEC’s enforcement division, said in a statement. “This action should send a clear message that the Commission and its Division of Enforcement have the expertise to investigate and charge even the most sophisticated fraudulent algorithmic trading strategies.”

Athena Capital Research paid the $1 million penalty without admitting or denying the SEC’s findings.

The announcement came just weeks after the Justice Department brought charges against a New Jersey-based high-frequency trader for a practice called “spoofing,” where large numbers of orders are placed and then canceled to allow algorithmic trading to profit.