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Sunday, February 5, 2023


Guest Post: “Large Trader Tag” by the SEC Insulting and Unconstitutional?

Courtesy of Tyler Durden

Submitted by Sal Arnuk of Themis Trading

This piece was emailed to me by a friend. Its author, John Harris, according to his own bio, is “the founder and managing partner in Ceylon LLC, a provider of communication software libraries that enable traders to conduct electronic trading business on major industry platforms.” So… I get it; he is staked in the debate. Either he or his customers do not want their activities to be scrutinized by the SEC, who is charged with keeping our markets fair and safe. I am not sure I agree with the limits (2million shares per day/ or $20 million value… I would have gone way higher… higher to the point where this is aimed at the HFT the SEC is trying to understand, without catching any traditional mutual funds or hedge funds in the trap) that the SEC is proposing, but I can’t think of a more reasonable approach for the SEC to take, then to collect data on activities it does not understand, yet seeks to regulate.

As industry participants who have watched this HFT defenses morph continually after each tactic fails, we are amused.

The first HFT defense was that “bloggers” were turtles who had no clue about market structure and trading, and how it worked. This  tact did not work, as so many critics have turned out to have quite extensive technical backgrounds, and trading experience and market structure knowledge that dwarfed that possessed by their lawyers and math majors.

The Second HFT defense was that  there was no data anywhere  that has shown HFT activities to be nefarious and harmful, only conjecture. Once numerous firms came out with studies explaining how the latency arbitrage was actually working, and detailing the adverse tick selection prevalent in specific trading destinations and ATS’s, this defense also died down.

The Third defense, the one that proclaimed that, while predatory and sleazy, current HFT was simply market making evolved, no different than  specialists back in the day. This also was shown to be not exactly true, as the requirements  for DMM’s, SLP’s and old school specialists are/were vastly different. Oh yeah… as well as one really big moral trap: If stealing an eighth or a teenie is wrong, then unfortunately so is stealing $1dollar. Or $21 billion dollars.

Now we are at the point where HFT defenders claim outrage that SEC employees might reverse engineer the prop algos that reverse engineer the buyside algos and trade ahead. You can’t make this up.

A flashlight in a dark room always sends the cockroaches scurrying. Which is why the SEC needs to stand firm, and remember their mandate to promote fair and orderly markets for investors. If some nefarious traders risk the SEC, the government, or the world seeing exactly how they operate, then… well… I don’t know… then by all means please let them take their  “liquidity” offshore to an environment that will allow their ilk to play. Don’t let the door hit you in the tukhus on the way out. Hey who knows. Maybe we will attract real long term capital again in the USA. Imagine that…

Anyways…. the piece; judge for yourself:

15 April 2010

Large Trader Reporting System Is Insulting, Unconstitutional

The U.S. Securities and Exchange Commission announced on April 14, 2010 that it has voted to propose a large trader reporting system (see SEC Release No. 34-61908; File No. S7-10-10) .

If implemented as proposed, this system would allow the Commission to obtain personally-identifiable data on the orders and trade data of firms deemed “large” by the Commission, on the basis of arbitrary thresholds it determines, without warrant or compensation for the search and taking of the data.

A “large trader” would initially be defined as a person or firm whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during a calendar day, or 20 million shares or $200 million during a calendar month.

As proposed, this system violates the fourth and fifth amendments of the U.S. Constitution.

For persons or firms deemed large traders by the Commission, the rule conditions participation in national securities markets on a priori surrender of their fourth amendment rights to be secure against unreasonable searches and seizures.  Order and trade data is highly-sensitive property of its owners.  Absent a valid search warrant based on probable cause and supported by oath or affirmation as required by law, the Commission has no more authority under the law to obtain and search such property than any other agency of government would have to search a person’s home or other property without a warrant.

The Commission has posited no exigent circumstances that would justify a warrantless search or seizure of this valuable, proprietary data.  Surely if such exigent circumstances existed, the Commission would say so.  In any event, such circumstances could not possibly implicate simultaneously the hundreds or thousands of persons or firms whose rights would be summarily abrogated by the Commission’s proposal, each of whom is entitled to a presumption of innocence under the law.  This rule allows criminal fishing expeditions by government agents, in clear violation of the constitution.

If put into effect, the proposed rule amounts to a taking of private property for public use without just compensation, in contravention of the fifth amendment.  If the Commission requires additional market data in order to fulfill its mission, then it must purchase that data from willing sellers on the open market.  This rule would deny persons or firms access to national securities markets unless they agree to a taking by government agents.  The proposal is tantamount to a government agent telling the owner of beachfront property, “We want to use your land for a naval shipyard, without actually purchasing or leasing it from you. You will not be able to use any facility owned or regulated by the government unless and until you comply with our demand.”

This proposal is unconstitutional and an affront to free people and markets.  If the Commission possesses evidence of violations of the securities laws of the United States, it has all the authority and resources it needs to investigate such purported violations and to prosecute as necessary.  In America, we do not allow government agents to search our persons, property, papers, or effects so that they can better educate themselves on how we live, work, and interact with others.  Absent a specific and credible allegation of unlawful activity, the Commission has no authority or legal basis to view or parse the data it seeks through this proposed rule.

If the Commission is granted the power it seeks, its employees will be able to reverse-engineer valuable, proprietary trading algorithms, which they can then employ for their own profit.  Arguably, by virtue of this proposal, these employees will come to possess an information advantage superior to that of any other trader on earth.  Perversely, once armed with this information, they could then shape their own order flow and trading activities to avoid the prying eyes and sticky fingers of other Commission employees.

The Commission should withdraw this insulting, un-American proposal.  All market participants should oppose and refuse to cooperate with it.

John Harris is founder and chief executive officer of BondMart Technologies, Inc., a developer of capital markets trading technology. He is also a founder and managing member of Ceylon LLC, a provider of communications software libraries that enable traders to conduct electronic trading businesses on major industry platforms.

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