High-speed trading firm hit with $1M penalty
Athena Capital Research was hit with a $1 million penalty Thursday to settle charges the New York City-based high-frequency trading firm manipulated prices of thousands of Nasdaq-listed stocks.
Using a trading algorithm dubbed "Gravy," Athena carried out the manipulation by placing high volumes of rapid trades during the final two seconds of nearly every trading day during a six-month period in 2009, the Securities and Exchange Commission alleged in an administrative proceeding.
The tactic, known as "marking the close," enabled the small firm to account for nearly three quarters of total Nasdaq volume in selected stocks during the seconds before daily 4 p.m. market closings and push prices in the firm's direction, the SEC said in an 11-page order.
The case marked the financial regulator's first case involving manipulation by a high-frequency trading firm. Companies that specialize in lightning-fast trades say they provide valuable liquidity that benefits investors and markets. But their strategies have come under increased public questioning since the recent publication of Flash Boys, a book in which author Michael Lewis argued U.S. stock markets are "rigged."
"Traders today can certainly use complex algorithms and take advantage of cutting-edge technology, but what happened here was fraud," said Andrew Ceresney, director of the SEC's enforcement division.
"When high-frequency traders cross the line and engage in fraud, we will pursue them as we do with anyone who manipulates the markets," added SEC Chair Mary Jo White.
Athena, founded in 2007 and now operating from Hong Kong as well as Manhattan's West Side, agreed to the settlement without admitting or denying the allegations.
"Athena believes that its trading activity helped satisfy market demand for liquidity during a period of unprecedented demand for such liquidity," the company said. Adding that it cooperated with the SEC from the investigation's start, Athena said it "stopped running the trading strategies in question several years ago, primarily due to declining market demand for liquidity."
According to the company's website, Athena accumulates, aggregates and analyzes a wide array of financial data from multiple sources. "Speed is critical to real-time trading. With so much data and so many ways to use it, we constantly strive to find solutions to move and process data faster," the website states.
The SEC order, however, shows investigators found evidence of market manipulation by trading desirable stock imbalances at the end of each trading day. The imbalances involved more orders to buy rather than sell shares near the market close, or vice versa.
For example, the order showed that Athena placed "imbalance only" trading orders the company called "collars." The company's orders were filled at least partially more than 98% of the time, a statistic Athena referred to as "dominating the auction" and "owning the game."
The company used its "Gravy" algorithm during the closing seconds of each day's market session, the SEC said.
"Athena's trading in the last two seconds accounted for 73% of the entire Nasdaq market volume, on average for the stocks it traded" during that time, the SEC order said. "These massive volumes ... allowed Athena to overwhelm the market's available liquidity and push the market price — and therefore the closing price — in Athena's direction."
Company traders tracked the Gravy results via a spreadsheet that at times measured the strategy's affect on share prices.
In an internal e-mail cited by the SEC, one Athena manager sent another a breakdown that showed Gravy made $5,300 in profits that day in trading on 33 stocks. The second manager, away from the office on vacation, e-mailed back: "Looks like we have some Mach chips ... going to Vegas tonight..."