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January 2, 2012

SEC Beefs Up Trading Enforcement

By Peter Chapman

The Securities and Exchange Commission's market structure crimes unit is hiring a group of non-lawyer trading specialists to aid in its investigations.

Daniel Hawke, chief of the two-year-old Market Abuse Unit of the SEC's Division of Enforcement, said recently that the new Analysis and Detection Center would complement the unit's legal firepower when ferreting out illegal or harmful trading strategies.

Daniel Hawke

"We've hired specialist non-lawyer people from the industry who really understand the trading activities we are looking at and the market environment in which those activities are occurring," Hawke said at the High Frequency Trading World conference in New York. "It will allow us to focus on conduct that is truly wrongful, as opposed to conduct that occurs every day."

There are five individuals in the new group: three quantitative analysts, one trading strategies specialist and a securities operations specialist. The five staffers will be located in the SEC's offices in Washington, New York, Chicago and Philadelphia. Ainsley Fuhr, a former derivatives trader at Goldman Sachs, is the trading strategies specialist and has been with the group for about a year.

The Market Abuse Unit was established in early 2010 as a response by the SEC to criticism over its failure to understand and police certain financial crimes during the last financial bubble, particularly the Bernie Madoff scheme. The 55-person unit includes 48 investigating attorneys and supervisors, the five trading specialists, and Hawke and his deputy. It is part of the SEC's Division of Enforcement, which employs between 1,300 and 1,400 people.

The original plan for the Market Abuse Unit was to focus on abuses related to order routing and best execution, Hawke said. That changed on May 6, 2010, the day of the notorious "flash crash." Because of the market flip-flop, Hawke's group is taking on a broader responsibility. Since then, the unit has initiated about 20 investigations into a variety of practices that potentially exploit market structure, Hawke told conference attendees (see table).

For trading pros, the unit's best known enforcement action to date has been the sanctioning in October of the exchange operator Direct Edge for violating U.S. securities laws because of weak internal controls. Problems surfaced in November 2010 when Direct Edge implemented new software code that caused some customers' orders to be overfilled. The snafu caused millions of dollars in losses, according to the SEC, and resulted in a system outage.



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SEE CHART: SEC Investigations