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SEC penalizes first high-frequency trader

AP Photo/Richard Drew

The Securities and Exchange Commission (SEC) charged a New York trading firm with the largest fine ever for breaking rules designed to keep risky trades from unraveling the financial system.

It is also the first time the SEC penalized a high-frequency trader.

High-frequency traders, or flash traders, make millions of trades a minute. They are the focus of an ongoing debate over whether those trades make the market function better or exploit slower, traditional traders.

Among flash traders, Latour Trading is a giant. Investigators say the company has comprised as much as 9 percent of total U.S. trading volume on any given day.

After an investigation, the SEC found the firm didn't keep enough cash on hand in case the market dropped, violating the commission's net capital rule. Latour was fined $16 million.

Traders were shocked to hear that the company would break such a fundamental rule.

"When you're swinging around that much stock, if they weren't capitalized enough and there was a market event...well, then we're all at risk," said Joe Saluzzi, co-head of equities at Themis Trading.

Saluzzi worries there are more companies out there like Latour and regulators are too slow to catch them.

"We move as quickly as we can in every investigation, and this is no exception," Andrew Ceresney, the SEC's Enforcement Director, said.

He says the investigation into Latour began three years ago.

"It takes us some time to investigate it. We do documents, take testimony, do analytics," he said.

Ceresney added that Latour was investigated because of the sheer volume of trades, not because it is a high-frequency trader. That said, regulators have ongoing investigations into whether high-frequency traders game the system. 

Charles is senior reporter focusing on special projects. He has won numerous awards including an IRE award, three SPJ Public Service Awards, and a National Murrow. He was also a finalist for the Livingston Award for Young Journalists and Third Coast Director’s Choice Award.
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