U.S. regulators brought their first-ever manipulation case against a high-frequency trading firm on Thursday, saying it used a computer algorithm to affect closing prices through a series of rapid-fire trades.
The Securities and Exchange Commission said New York City-based Athena Capital Research has agreed to pay a $1 million penalty to settle the charges without admitting or denying them.
The SEC said the firm's algorithm, code-named "Gravy," was programmed to place a large number of aggressive trades for Nasdaq-listed stocks in the final two seconds of nearly every trading day in a practice known as "marking the close."
The trading strategy let the firm "overwhelm" the available market liquidity, the SEC said, and artificially impact prices.
In internal emails, the SEC said the firm knew exactly what it was doing, and said it was "owning the game."
At one point, when the Nasdaq stock exchange issued automated warnings about "suspicious orders or quotes" designed to manipulate the closing price, the SEC said the firm's chief technology officer forwarded the alert to several managers and said "let's make sure we don't kill the golden goose."
In a statement, Athena Capital Research said that while it does not admit or deny the charges, it also still believes that "its trading activity helped satisfy market demand for liquidity during a period of unprecedented demand for such liquidity."
The firm added that it stopped deploying those trading strategies several years ago due in part to a decline in market demand.
"Athena is pleased to settle this matter on reasonable terms," it added.
The case comes at a time when high-frequency trading and other equity market issues have been garnering headlines.
Earlier this year, a book by best-selling author Michael Lewis said markets were "rigged" by traders who use rapid-speed trading to front-run or get the jump on ordinary investors when placing orders.
SEC Chair Mary Jo White and others have since dismissed this claim, saying the markets are not rigged.
Still, the SEC for the past few years has been investigating high-speed traders and others for potential concerns about manipulation or other practices that may give some market players an unfair advantage.
"When high frequency traders cross the line and engage in fraud we will pursue them," said SEC Chair Mary Jo White in a statement Thursday.
Athena is a relatively small high-speed firm formed by two former colleagues who worked at another, larger high-speed firm. The fund that deployed the trading strategies at the heart of the complaint had only $40 million in assets under management at the time.
But the SEC said those tactics let Athena dominate the trading of certain Nasdaq stocks right before the close.
The SEC said the alleged manipulation spanned six months in 2009.
Andrew Ceresney, the SEC's enforcement director, said in a press call that the agency still has a "number of other investigations" underway involving manipulative trading.
He said this case took a while to bring, in part because it involved the SEC having to actually analyze the algorithmic codes and trading data.
Last month, the SEC also charged Latour Trading LLC, another high-speed firm, but that case hinged on allegations that it had failed to hold enough capital to support its trading activity.
