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Tim Quast
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We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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December 1, 2004

Preventing a Long Term Capital Fiasco

By Gregory Bresiger

On a 3-2 vote, the Securities and Exchange Commission gave final approval on a plan to require hedge fund registration. This is a plan designed to prevent fraud in this growing business - and a repeat of the Long Term Capital Management (LTCM) fiasco. SEC officials now have the power to review the books of closely held investment partnerships and the managers of these funds are now required to register with the regulators. SEC Chairman William Donaldson, backed by the two Democrat members of the SEC, supported the measure, which was recommended by the commission's staff. The rule requires hedge fund managers to do several things, among them filing the ADV adviser form with the SEC.

The staff, in a memo to the commission, wrote that, "Effective Commission oversight could lead to earlier detection of actual and potential misconduct, help to deter fraud and encourage a culture of compliance and controls."

However, commissioners Paul Atkins and Cynthia Glassman dissented. "I continue to be concerned that the registration and concomitant inspection are the wrong approach," Glassman said. "I do not think that the form ADV even as amended provides the type of information that would be helpful in identifying fraud, nor do we have the resources or the expertise to ferret it out in our examinations."

Commissioner Atkins, who previously complained that the government should not provide bailouts for the investments of the rich, said he was "befuddled as to why we are charging ahead." He argued that the SEC should devote its resources to traditional mutual funds and broker dealer services. Much of the hedge fund industry complained that registration costs would be a burden.

Still, Chairman Donaldson warned that, "without registration, how can we begin to understand fully the impact that the hedge fund advisers have on the broad market of individual, institutional, and professional advisers with which funds trade?"