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SEC Charges New York-Based High Frequency Trading Firm With Fraudulent Trading to Manipulate Closing Prices

First High Frequency Trading Manipulation Case


Washington D.C., Oct. 16, 2014 —

The Securities and Exchange Commission today sanctioned a New York City-based high frequency trading firm for placing a large number of aggressive, rapid-fire trades in the final two seconds of almost every trading day during a six-month period to manipulate the closing prices of thousands of NASDAQ-listed stocks.  This marks the first high frequency trading manipulation case.

An SEC investigation found that Athena Capital Research used an algorithm that was code-named Gravy to engage in a practice known as “marking the close” in which stocks are bought or sold near the close of trading to affect the closing price.  The massive volumes of Athena’s last-second trades allowed Athena to overwhelm the market’s available liquidity and artificially push the market price – and therefore the closing price – in Athena’s favor.  Athena was acutely aware of the price impact of its algorithmic trading, calling it “owning the game” in internal e-mails.

Athena agreed to pay a $1 million penalty to settle the SEC’s charges.

“When high frequency traders cross the line and engage in fraud we will pursue them as we do with anyone who manipulates the markets,” said SEC Chair Mary Jo White.

According to the SEC’s order instituting a settled administrative proceeding, although Athena was a relatively small firm, it dominated the market in the last few seconds of a trading day for stocks that it otherwise traded only slightly.  The manipulative trading described in the SEC’s order occurred from June to December 2009 and made up more than 70 percent of the total NASDAQ trading volume of the affected stocks in the seconds before the market close.

“Traders today can certainly use complex algorithms and take advantage of cutting-edge technology, but what happened here was fraud,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “This action should send a clear message that the Commission and its Division of Enforcement have the expertise to investigate and charge even the most sophisticated fraudulent algorithmic trading strategies.”

The SEC’s order finds that Athena’s manipulative scheme focused on trading in order imbalances in securities at the close of the trading day.  Imbalances occur when there are more orders to buy shares than to sell shares (or vice versa) at the close for any given stock.  Every day at the close of trading, NASDAQ runs a closing auction to fill all on-close orders at the best price, one that is not too distant from the price of the stock just before the close.  Athena placed orders to fill imbalances in securities at the close of trading, and then traded or “accumulated” shares on the continuous market on the opposite side of its order.

According to the SEC’s order, Athena’s algorithmic strategies became increasingly focused on ensuring that the firm was the dominant firm – and sometimes the only one – trading desirable stock imbalances at the end of each trading day.  The firm implemented additional algorithms known as “Collars” to ensure that Athena’s orders received priority over other orders when trading imbalances. These eventually resulted in Athena’s imbalance-on-close orders being at least partially filled more than 98 percent of the time.  Athena’s ability to predict that it would get filled on almost every imbalance order allowed the firm to unleash its manipulative Gravy algorithm to trade tens of thousands of stocks right before the close of trading.  As a result, these stocks traded at artificial prices that NASDAQ then used to set the closing prices for on-close orders as part of its closing auction.  Athena’s high frequency trading scheme enabled its orders to be executed at more favorable prices.

The SEC order censures Athena and finds that the firm violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Without admitting or denying the findings, Athena agreed to pay the $1 million penalty and cease and desist from committing or causing any future violations of the securities laws.

The SEC’s investigation was conducted by William Finkel, Peter Lamore, Preethi Krishnamurthy, and Alexander Vasilescu.  The case was supervised by Michael Osnato.  The Enforcement Division worked closely with the SEC’s Division of Economic Risk and Analysis and the Quantitative Analytics Unit.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.


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