Category Archives: Regulation

A Primer on How Currency Manipulation Worked –

A Primer on How Currency Manipulation Worked – “The Fix” Video

Finance professionals (including academics) should start replacing some terms, which may date back a century, used in our field. One example is the widely used term “fix” that refers to the determination of market-clearing (in economics terms equilibrium, i.e. when demand equals supply) price and/or rate. Recent multi-billion legal settlements regulators achieved show that the processes of “silver fix”, “gold fix” and “currency fix” were (allegedly?) manipulated by the market participants, i.e. banks and dealers. In Main Street, the word “fix” may carry a bad connatation (e.g. “game was fixed”). Why should Wall Street continue using terms which may suggest that financial markets may be unfair, especially when the recent events bolstered potential notion of this unfairness since some big banks, dealers and traders are charged with “fixing the fixes” or “manipulating the fixes”! These reinforce the bad connatation some finance terms may carry, “silver or currency fix was fixed”!!!

#currencyfix, #thefix, #manipulation, #fixingthefix

Hofstra Zarb School’s MS Finance Program is ranked 43rd by The Financial Engineer

2015 Finance Rankings | The Financial Engineer.

Hofstra's Master of Science in Finance Program is ranked 43rd nationally by The Financial Engineer. Hofstra’s Master of Science in Finance program is ranked 43rd nationally by The Financial Engineer. One of the more successful tracks of Zarb’s MS Finance program is its Risk Management concentration. Dr. Karagozoglu hopes that this success will encourage financial regulators – the SEC, CFTC, OCC, FINRA and the Fed- as well as the exchanges to hire top ranked risk management degree holders from Hofstra University’s Zarb School of Business.

Why High-Frequency Trading Is So Hard to Regulate –

Why High-Frequency Trading Is So Hard to Regulate –

Peter J. Henning writes in’s DealBook that “The challenge in pursuing charges against these firms is that they are taking advantage of changes in the technology underpinning the markets to profit from quick trades, which is not illegal. But regulators can find it difficult to draw the line between acceptable trading strategies and manipulation because of the complexity of the strategies.”

However, detecting market manipulation (either potential or attempted) has always been challenging since the beginning of financial markets. Regulators’ timely access to detailed data on security market transactions is the key in successful market surveillance. Advances in market microstructure technology makes this task much easier today compared to the paper based trading of the past. Regulators should be able to view all the details of market transactions in real-time, especially for the exchange traded instrument since everything is in the electronic records of the exchanges. Imposing new rules to require market participants submit detailed transactions data after-the-fact feels like regulatory responses of the last century.

In his 2011 Review of Futures Markets publication, Dr. Ahmet Karagozoglu suggests that regulators (and self-regulators) should design their own “market surveillance algorithms” and “co-locate” with exchanges’ matching engines in order to facilitate detection and rapid respond to improper trading activity that might be taking place at extreme speeds. Number of Quants, Financial Engineers, Risk Modelers and Algo Developers employed by the regulatory agencies need to increase dramatically (at the least should be close to the number of lawyers and legal staff)! Regulators’ market surveillance algorithms should rival in their speed and complexity the trading strategies used by market participants.


FINRA addressing market risks: HFT, Algo’s, CARDS, CAT & dark pools

FINRA addressing market risks: HFT, Algo’s, CARDS, CAT & dark pools*

Carlo di Florio Remarks at NSCP 2014 National Conference – FINRA.

In*, Thomas K. Potter, III of Burr & Forman LLP discusses Carlo DiFlorio’s, FINRA’s Chief Risk Officer and Head of Strategy, remarkes at “the annual meeting of the National Society of Compliance Professionals Monday that FINRA is emphasizing efforts to mitigate market risks, even as it regards US capital-market integrity as at its strongest historically.

HFT & Algorithmic Trading: DiFlorio addressed thee initiatives.  First, FINRA examiners are focusing on firms’ supervision of HFT and algorithmic trading, including pre-implementation testing and firm-wide “kill switch” procedures when something goes awry. Second, FINRA’s Board decided at its September meeting to propose a rule requiring FINRA registration by those who develop, design or significantly modify trading algorithms.  The Staff  is drafting a proposed rule for comment. Third, FINRA is working on additional guidance on existing supervisory obligations for algorithmic trading. Market Surveillance & Big Data: FINRA also is working to boost its market-surveillance capabilities.  FINRA’s surveillance systems monitor for 29 cross-market patterns attuned to 55 threat scenarios.  When current initiatives are complete, FINRA surveillance will cover 90% of markets. Second,  FINRA is one of final bidders under consideration by the SEC for a new Consolidated Audit Trail (“CAT”) processor to improve “data mining” of information across markets. Third, FINRA is working to increase transparency of dark-pool and other alternative markets, including expanding FINRA’s disclosure of Alternative Trading System (“ATS”) volume data. Fourth, FINRA’s second CARDS (comprehensive automated risk data system) proposal is out for comment until December 1.  The proposed Rule would standardize and automate a broad range of securities account and transaction data from clearing (and later fully disclosed introducing) firms.  It is another effort to assemble more easily mined “big data” for industry-wide surveillance and compliance.”

Burr & Furman’s Blog

Speed trader fined $1 million for Nasdaq manipulation scheme

Speed trader fined $1 million for Nasdaq manipulation scheme.

Dr. Ahmet Karagozoglu says this closing price manipulation reminds him why closing prices are different from settlement prices in futures markets. In light of Athena Capital Research LLC case he suggests that, to prevent closing price manipulation in stock markets, regulators and stock changes should learn from the rules of futures exchanges.

Historically, futures exchanges in the U.S. and abroad have been concerned about potential manipulation of closing prices each trading day. Since margin accounts are marked-to-market at the end of each trading day, exchanges had established rules to prevent the negative effect of unfounded quotes and trades during the closing minutes (seconds) of trading on the margin account settlements. Thus, we have both closing and settlement price in futures markets. Exchange rules describe how the end-of-day settlement prices are determined in order to prevent closing price manipulations which are attempted to generate unfair margin profits.

Securities and Exchange Commission (SEC) says with “high-powered computers, complex algorithms and rapid-fire trades,” the New York-based firm tainted closing prices used by fund managers to track their performance.

U.S. Senate Hearing on HFT: Questions of Senators

Watching the U.S. Senate’s the Permanent Subcommittee On Investigations Hearing: Conflicts of Interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets

Senator Ron Johnson: “Where do you get your data?” (in referring to the analysis of order execution costs)

Robert H. Battalio, Professor of Finance, University of Notre Dame: “From a major ibank (investment bank). We don’t have detailed/good data.”

Dr.K: Regulators/policy makers should have a record of all the transactions in financial markets so that their natural duty of ‘market oversight’ is easier to handle. In that case, academic researchers and regulators won’t have difficulty answering questions ‘what happened?’.

Senator John McCain: “Michael Lewis in his excellent book and 60 Minutes interview said markets are rigged. Are they?”

Bradley Katsuyama, President & CEO of IEX Group, Inc: Word ‘rigged’ may be used to describe markets.

Dr.K: Best marketing campaign for IEX exchange.

U.S. Senate Hearing on HFT: Statements of Senators

Watching the U.S. Senate’s the Permanent Subcommittee On Investigations Hearing: Conflicts of Interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets

Senator John McCain: SEC’s Reg NMS should be changed.

Dr.K: Reg NMS was supposed bring “best price” execution to the equity markets. If advances in technology and market structure changes result in different outcome from the intended consequences of regulation, this does not mean that the new practices, i.e. HFT as Senator McCain suggested, are “bad”. It just suggests that policy/regulation is slow in their oversight of the markets. And law makers referring to the book “Flash Boys” by Michael Lewis as one of their reasoning for a hearing also suggests that regulation/policy making is reactive as opposed to proactive.

Senator Carl Lewin: High Frequency Traders have predatory practices. Co-location is not fair.

Dr.K: Exchanges create the trading structure within the current regulations and given that market structure any trading practice which appears to be taking advantage of opportunities should not be blamed.  Co-locating one firm’s server, by purchasing space sold by the exchange, next to that exchange’s matching server is no different than a firm or individual becoming a member (by purchasing a seat) of the exchange and stand on the floor next to specialist to transact during the “floor trading” days.

Dr. Karagozoglu’s Publication was referenced by CFTC’s Sub-Committee on Automated and High Frequency Trading

Dr. Karagozoglu’s research article titled “Direct Market Access in Exchange-Traded Derivatives: Effects of Algorithmic Trading on Liquidity in Futures Markets”, published in The Review of Futures Markets, Summer 2011, v.19, special issue, pp. 95-142, was referenced at the presentation of the Sub-Committee on Automated and High Frequency Trading on June 20, 2012. Presentation in PDF format.

CFTC Technology Advisory Committee meeting June 20, 2012

U.S. Commodity Futures Trading Commission-CFTC Technology Advisory Committee Meeting Schedules

TAC Meeting Video June 20, 2012

Julie Segal Senior Writer, Institutional Investor Magazine tweets HFT, Fair and Balanced post

Julie Segal Senior Writer, Institutional Investor Magazine tweets HFT, Fair and Balanced post at the TabbFORUM as thought leadership from Dr. Ahmet Karagozoglu

Julie Segal - thought leadership tweet @ Muck Rack

Julie Segal Senior Writer, Institutional Investor Magazine - Tweet June 12, 2014