

SEC Proceeding against Athena Capital Research [pdf] - Sujan
http://www.sec.gov/litigation/admin/2014/34-73369.pdf

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hft_throwaway
Matt Levine's Bloomberg article is a good layman's explanation of the issues:
[http://www.bloombergview.com/articles/2014-10-16/high-
speed-...](http://www.bloombergview.com/articles/2014-10-16/high-speed-
traders-put-a-bit-too-much-gravy-on-their-meat)

They were wrong and got punished, but the market would have punished them
eventually anyway, and it sounds like it was already doing so. The SEC filing
states that this scheme lost them $3mm on an index rebalance day when activity
in the closing auction peaks. That should be a great opportunity for anyone
intermediating between the continuous and auction books, so it is very
surprising that they'd lose. Someone probably caught on that they were
manipulating the close and waited for a big day to take advantage of them, or
there was so much activity that they didn't have enough ammo to goose the
price like on slower days.

Also, to be clear, there is nothing illegal about HFTs intermediating between
the continuous and auction books or the majority of HFT activity. These guys
were charged because they committed fraud, the use of a computer was
ancillary.

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tptacek
I have never read a bad Matt Levine article. That guy is amazing.

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tptacek
You can safely ignore Newsweek's coverage. The meat is in the SEC action:

[http://www.sec.gov/litigation/admin/2014/34-73369.pdf](http://www.sec.gov/litigation/admin/2014/34-73369.pdf)

Basically: Athena targeted stocks with closing time imbalances between buys
and sells, where NASDAQ ran a special order routing process, and traded with
itself to influence the price reported at market close.

The dollar amounts the SEC describes are insignificant (that's obviously not a
defense for the firm charged with the behavior).

~~~
hft_throwaway
I don't believe they were trading with themselves. They were accumulating
stock in the opposite direction to hedge their imbalance-only order. However,
the way they accumulated that stock was done in a way that would impact the
price received on the closing order.

So imagine they sold 10000 shares imbalance-only in the auction at 3:50. They
would then buy 2500 immediately, slowly pick up another 2500 in the next 9
minutes, then do the last 2500 in the last second. The initial trades would
get them into their hedge at a low average price, and the last-second ones
would push the price of the closing auction up, maximizing their return on
their imbalance-only order.

If you read the case, it seems like this didn't always work if they had
slippage on the close or they got so aggressive that they would "flip" the
imbalance and not get filled on their closing order at all, instead being
stuck with a bunch of shares from crappy prices. The people trading with them
in the last two seconds could also keep replenishing their orders and prevent
them from spiking the price. Sounds like a dangerous game of high-stakes
chicken.

~~~
tptacek
You're obviously right; the Levine article you posted downthread does an
excellent job describing the high-level strategy they employed. Thanks!

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anonu
Being very familiar with this type of trading, I am very surprised that they
were that stupid to trade in big size near the close.... I'm also surprised
that this was a successful strategy on the Nasdaq... especially in 2009 as
volatility was coming down quite a bit from the previous years.

What the SEC really should be investigating is the rampant use (or probably
misuse) of d-quotes on the NYSE. These effectively allow you to put on-close
orders after the on-close cutoff time of 1545. These orders get routed to
specialists and god knows what theyre doing behind the scenes.... I havent run
the numbers but I would wager that last-15 minute volatility in NYSE names is
way higher than on NASDAQ. Get rid of the d-quotes and get rid of the
specialists....

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conistonwater
Stupid question about this line on p.11:

> Respondent Athena cease and desist from committing or causing any violations
> and any future violations of Section 10(b) of the Exchange Act and Rule
> 10b-5 thereunder

Why does the SEC order a firm to desist from committing violations of some
rule? Aren't firms supposed to be not violating them anyway, regardless of
whether they are specifically ordered by the SEC not to?

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mol10
Seems odd, right? My guess is it's primarily about future remedies: Violating
an injunction (once in place) adds another potential remedy against the actor
if the actor does the same act again.

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ipsin
I understand that the SEC is also asking Athena to cease and desist, but did
Athena's scheme actually make them money? If so, a $1M civil penalty doesn't
seem like much of a deterrent for those thinking to do the same thing.

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pmalynin
So can anyone explain why this is a problem? Because it seems that some people
just made a clever algorithm that didn't hurt anyone.

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rbcgerard
of course this happens look at the the difference between the spot vix and the
futures settle price...

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noname123
To manipulate VIX price, don't you need to buy/sell an order of more magnitude
of SPX contracts. On the same topic, I'm not a big fan of the RLS of RUT
contracts as it gives so much uncertainty on settlement day.

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stevengg
Leah McGrath Goodman is not a reliable source for news edit: someone changed
link from newsweek story

