The Catholic University of America





Gregg E. Berman, Associate Director of the Office of Analytics and Research, Division of Trading and Markets,SEC,
with Professor David Lipton, Director of the Securities Law Program, Columbus School of Law.


SEC Official Says No Easy Way to Police High-Frequency Trading


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The Securities and Exchange Commission has been under pressure for years to do something about the incidence of high-frequency trading (HFT) that now accounts for more than half of all U.S. equity trading volume. 

HFT is a form of algorithmic trading in finance that uses sophisticated technological tools and computer algorithms to carry out proprietary trading strategies that move in and out of positions in seconds or fractions of a second. Its practitioners make tiny profits on each trade, which is multiplied by the ability to make millions of trades each day.
HFT was found to have contributed to volatility in the 2010 Flash Crash.  Initially, an unintended computerized order triggered a trading imbalance.  This imbalance led to the high-frequency liquidity providers rapidly withdrawing from the market. Several European countries have proposed curtailing or banning HFT due to concerns about volatility.
During remarks titled “High Frequency Trading — What is it, and How Does it Impact the Markets” offered at CUA Law on Oct. 29, a senior SEC official explained that the integrated nature of the computer systems that drive equity trading today makes it difficult to regulate just one aspect of it.
“This is a completely coupled system,” said Gregg E. Berman, Ph.D., Associate Director of the Office of Analytics and Research, Division of Trading and Markets at the SEC. 
While the SEC has valid concerns about HFT’s impact upon the financial system, the practice should not be construed as oppositional to long term investment trading. It is not a simple case of good guys versus bad guys, Berman noted. For one thing, the technological innovations that drive HFT can benefit every trader.  In addition, some of the impact of HFT is indistinguishable from non-computerized trading. It just comes in larger numbers.
“The biggest impact technology has had on market trading is the ability to input multiple data sets at the same time,” said Berman.
He also pointed out that high-frequency traders battle each other, not regular investors.
“The competition tends to be among market professionals. People develop all these technologies basically to beat other professionals,” he explained.
It has been argued that a core incentive in much of the technological development behind high frequency trading is essentially front running, in which the varying delays in the propagation of offers is taken advantage of by those who have earlier access to information.
Berman agreed. “It’s not the race for speed. It’s the race for who is first,” he said.
Other complaints against HFT include the argument that some HFT firms scrape profits from investors when index funds rebalance their portfolios. Other financial analysts point to evidence of benefits that HFT has brought to the modern markets. Researchers have stated that HFT and automated markets improve market liquidity, reduce trading costs, and make stock prices more efficient.
Berman was introduced by David Lipton, Professor of Law and Director, Securities Law Program, which sponsored the talk. Berman is the second high-ranking SEC official to visit the law school in the past month. On Sept. 29, SEC Commissioner Daniel M. Gallagher, a 1999 alumnus CUA Law, spoke about recent developments at the SEC.