US regulators probe 'mini-manipulation' of stocks, options
WASHINGTON, Sept 20 (Reuters) - Regulators are getting more complaints about the alleged "mini-manipulation" of stocks so that favorable positions can be established in stock options, the head of the securities' industry watchdog organization said on Thursday.
Some firms appear to have algorithms - the computer code that carries trading instructions - that move the underlying equity, said Rick Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority.
"In some cases we are concerned about manipulation of the underlying equity in order to establish options positions at favorable prices or manipulate the options implied volatility," Ketchum told a conference of the Securities Traders Association in Washington.
Finra has enhanced its surveillance systems to capture this type of activity, which Ketchum called a "major focus" of the organization.
The speed of high-frequency trading may amplify or even make certain manipulative strategies more feasible because a move in the underlying equity of a stock option will instantaneously impact its pricing, he said.
"This means that a manipulator does not need to move the equity for any extended period to have a significant impact on the options market," Ketchum said.
Ketchum did not indicate any specific cases or provide examples of alleged manipulation or strategies. Finra is examining the controls firms have on their algorithms and whether they have the appropriate pre-trade checks in place, he said.
Asked about Ketchum's comments, Gary Katz, president and chief executive of the International Securities Exchange, a leading U.S. options exchange and unit of Deutsche Boerse AG (DB1Gn.DE), said ISE does not comment on regulatory issues.
Finra has created surveillance alerts to capture excessive message traffic from algorithms that update quotes at "ferocious speeds," at times updating several thousand options quotes in a second without a change in the underlying price, Ketchum said.
"We have received a large number of complaints in this area," he said.
Firms have told Finra that the microbursts of quoting activity are often due to algorithms that trip over themselves, he said.
"Of course, in certain situations, the apparent excessive quoting is in fact due to rapid changes in the underlying security," he said.
(Reporting By Herbert Lash; Editing by Richard Chang)
((herb.lash@thomsonreuters.com)(5255 5282 7153)(Reuters Messaging: herb.lash.reuters.com@reuters.net)) Keywords: EXCHANGES FINRA/
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