The Securities and Exchange Commission (SEC) is in negotiations with BATS Global Markets, Inc. (BATS:BATS) to settle charges the stock exchange provided high frequency traders unfair advantages, the Wall Street Journal is reporting, citing unnamed sources. The move could the the first major manifestation from SEC Charwoman Mary Jo White’s plan to reign in the trading practice.


BATS’ O’Brien supports HFT

BATS had a reputation as the most vocal supporter of high frequency trading and its former CEO, William O’Brien, had waged a moral crusade on Twitter and TV interviews proclaiming that his viewpoint would be vindicated. Some behind the scenes viewed the battle as more of a fight to see if the political power of the financial services lobby could once again overpower the US regulatory and justice system.

It was just two weeks ago that the exchange abruptly removed O’Brien as BATS Global Markets, Inc. (BATS:BATS) CEO in a terse statement, a move that raised suspicion something larger was afoot at the exchange.  The Journal is reporting that the expected agreement between the SEC and the exchange is one reason for O’Brien’s removal.

Issues with SEC investigating HFT operators

Among the issues in the SEC investigation, which started in 2011, are a deluge of order types that provide HFT operators special advantages. This includes the somewhat infamous “hide not slide” order type that allows the HFT firm to display phantom liquidity and, critics charge, displays false and misleading stock price quotes.

The investigation is examining if the order types were fully disclosed to investors on the other side of the trade, among other issues.  This is particularly the case with what HFT critics consider deceptive, “slight of hand” order types akin to bait and switch tactics long ago outlawed in the human world.  Other points of the investigation are said to be HFT’s preferred access to market moving information generally not available to all market participants and providing preferred HFT access to market trade routing that is faster than the other traders access.

The move against BATS is among the highest profile attempts by the SEC to reign in players in the exchange world who had codified HFT since SEC Chairwoman Mary Jo White announced her plan on June 5 this year.  After White’s speech, various HFT participants had noted the serious tone and that business models that had codified questionable if not illegal HFT behavior would likely change.  The first major manifestation of that speech could be seen in the BATS settlement.