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Legal Update

US SEC Brings First Enforcement Action For Market Manipulation Through High-Frequency Trading

23 October 2014
Mayer Brown Legal Update

Providing another reminder of the US federal government’s ongoing scrutiny of high-frequency trading (“HFT”) firms and manipulative trading practices involving HFT, the Securities and Exchange Commission recently settled its first market-manipulation case against a HFT firm under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5, which prohibit fraudulent conduct in connection with the purchase or sale of securities.

In an October 16, 2014 Order, Athena Capital Research, LLC (“Athena”), a New York City-based HFT firm, agreed to pay a $1 million penalty to settle the SEC’s administrative charges, without admitting or denying the SEC’s findings.1 In its Order, the SEC found that during a six-month period in 2009, “using high-powered computers, complex algorithms, and rapid-fire trades, Athena manipulated the closing prices of tens of thousands of [NASDAQ] stocks during the final seconds of almost every trading day.”2

According to the SEC’s Order, Athena created a computer program—referred to internally as “Gravy”—to engage in a practice known as “marking the close,” which involved placing a large volume of last-second trades that allowed Athena to take the market’s available liquidity and “artificially push the market price—and therefore the closing price—in Athena’s favor.”3 The SEC determined that by engaging in this practice, Athena comprised over 70 percent of the NASDAQ trading volume in the targeted stocks during the seconds before the market close. The SEC further found that Athena focused its manipulative practices on trading in order imbalances. As explained in the SEC’s Order, “[i]mbalances for the close of trading occur when there are insufficient on-close orders to match buy and sell orders, i.e., when there are more on-close orders to buy shares than to sell shares (or vice versa), for any given stock.”4

Near the end of each trading day, NASDAQ runs a closing auction to fill all on-close orders at a price targeted to the price of the stock in the continuous market. As part of this auction process, NASDAQ releases alerts—called Net Order Imbalance Indicator (“Imbalance Message”)—to solicit offers to fill all on-close orders at the best price, which are sent 10 minutes before the end of the trading day. Upon the release of the first Imbalance Message, Athena placed orders to fill imbalances in a security (which would execute only in the event of an imbalance), and then traded shares on the continuous market on the opposite side of its order, using algorithms known as “accumulators.”

In its findings, the SEC relied on internal emails to conclude that Athena was well aware of the pricing impact of its strategies. For example, the SEC cited one instance in which an Athena manager—after observing that Gravy had accumulated only approximately 25 percent of its target accumulation, which therefore had no price impact on the stock—e-mailed another Athena manager and Athena’s Chief Technology Officer, stating, “make sure we always do our gravy with enough size.” The SEC further found that Athena balanced its orders so they were large enough to move the stock price but not so large that they attracted regulatory scrutiny or resulted in unacceptable trading risks. The SEC also noted that Athena continued to engage in its marking the close strategy even after receiving a NASDAQ automated Regulatory Alert—titled “Scrutiny on Expiration and Rebalance Days”—which stated that “Suspicious orders or quotes that are potentially intended to manipulate the opening or closing price will be reported immediately to FINRA.”5 Athena’s Chief Technology Officer forwarded the alert to two Athena managers, stating: “Let’s make sure we don’t kill the golden goose.”

The Athena case is in line with the SEC’s intensified focus on HFT firms and manipulative trading practices involving HFT. While the SEC has signaled that there is nothing inherently wrong with HFT generally, specific HFT strategies that resemble traditional forms of market manipulation or that cause market disruption may be subject to vigorous enforcement action and increased regulation. In announcing the settlement with Athena, Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated that “[t]raders today can certainly use complex algorithms and take advantage of cutting-edge technology, but what happened here was fraud…. 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.”6 SEC Chair Mary Jo White echoed these remarks, stating: “When high frequency traders cross the line and engage in fraud we will pursue them as we do with anyone who manipulates the markets.”7

In a June 2014 speech, White announced that she had directed her staff to develop a recommendation for an anti-disruptive trading rule focused on HFT practices. Although White acknowledged that “the SEC should not roll back the technology clock or prohibit algorithmic trading,” she stressed that the SEC was “assessing the extent to which specific elements of the computer-driven trading environment may be working against investors rather than for them.”8 And, on a conference call with reporters regarding the Athena case, Ceresney confirmed that the SEC has “a number of other investigations” into computer-driven trading firms for manipulative activity.9

The Athena case suggests that HFT firms should expect continuing regulatory scrutiny. The SEC—along with the Department of Justice and the Commodity Futures Trading Commission—are devoting substantial resources to manipulative trading practices, including those involving HFT. Indeed, as we wrote about in our October 14, 2014 legal update, the DOJ recently brought its first criminal charges of alleged spoofing in the commodities market, which targeted a HFT firm.10

In this environment, it is critically important for HFT firms to develop compliance programs and safeguards to guard against manipulative trading practices and the risk of regulatory or criminal actions. HFT firms should actively monitor their algorithms and trading systems. This monitoring should include procedures and controls to detect and prevent potential trading abuses. Because intent may be difficult to disprove, HFT firms should make sure that their trading patterns do not resemble manipulative practices and, ideally, they should document the non-manipulative rationale(s) for the trading pattern or practice. HFT firms should also look to outside counsel with experience in these areas to assist in navigating this rough terrain and to help them respond in the event of a regulatory inquiry, or potential private litigation.

1 Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Section 203(e) of the Investment Advisors Act of 1940, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order, In the Matter of Athena Capital Research, LLC, No. 3-16199 (SEC Oct. 16, 2014), available at
2 Id. at 2.
3 Id. at 7.
4 Id. at 2.
5 Id. at 3.
6 Press Release 2014-229, U.S. Sec. & Exc. Comm’n, SEC Charges New York-Based High Frequency Trading Firm With Fraudulent Trading To Manipulate Closing Prices (Oct. 16, 2014), available at
7 Id.
8 Mary Jo White, Chair, U.S. Sec. & Exc. Comm’n, Enhancing Our Equity Market Structure (June 5, 2014), available at
9 Bradley Hope, High-Frequency Trader Athena Capital Settles Stock-Manipulation Charges, Wall St. J., Oct. 16, 2014, available at
10 Indictment, United States v. Coscia, No. 14-CR-00551 (N.D. Ill. Oct. 1, 2014) available at,


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