SEC Asks For Documents Of HFT Firm In Potential Fraud Case

Securities And Exchange Commission SECBy U.S. Government [Public domain], via Wikimedia Commons

A onetime leading high frequency trading firm is now being investigated for securities fraud as it winds down its business amidst a difficult environment for HFT firms.

SEC reviewing documents of HFT firm

The US Securities and Exchange Commission (SEC) is currently reviewing Infinium Capital Management records with a particular focus on a lawsuit filed by former employees, according to a Reuters report.  At issue are acquisitions made by employees in January that Infinium senior management lured them to invest a total of $4.1 million while failing to disclose the firm’s true financial position.  The 31 employees, some of whom invested their life savings, later lost all their investment as the true nature of the firm was discovered.

Once high flying Infinium crashing down to earth

Infinium was among Chicago’s highest profile trading firms.  It was a major market maker across commodities, energy and financial products and in 2009 was named by Crain’s Chicago Business as the 4th best place to work in Chicago.

Within the past few months the firm began to wind down trading operating and sold its assets to FXCM Inc (NYSE:FXCM), which launched a joint venture with some of Infinium’s employees

Infinium’s tale is similar to other HFT firms that first started as market makers, initially taking a position on both sides of a market and profiting from the spread between the buy and sell price as well as receiving rebates from exchanges.  As the tick prices commodities and stocks were traded in grew smaller, it shrunk the profits of the pure market maker.

Market makers such as Infinium then turned to HFT directional trading strategies when traditional market making no longer yielded appropriate revenue.  However, the HFT strategy, once highly profitable, is now facing a difficult low volatility market environment, shrinking trading volume and a manipulated interest rate keeping a lid on market trends has combined with increased competition and regulatory scrutiny.

In some cases, the HFT world has devolved into an arena where those profitable firms often are required to utilize significant amounts of capital to push markets back and forth – a risky technique under a regulatory glare – or the firms can rely on receiving news releases before the general public. While speed to market was at one point a costly point of differentiation, competition in the HFT arena has typically narrowed any advantage that one firm might have over another.

The request for documents by the SEC is related to the lawsuit and should “not be construed as an indication by the Commission or its staff that any violation of the federal securities laws has occurred, nor should it be a reflection upon any person, entity, or security,” according to a SEC letter reviewed by Reuters’ Tom Polansek.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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