The Securities and Exchange Commission also censured Athena Capital Research, which it said used a trading algorithm code-named "Gravy" to manipulate the closing prices of thousands of stocks on the Nasdaq market. Athena placed a large number of rapid trades in the final two seconds of nearly every trading day over six months, the SEC said Thursday.
Athena engaged in the manipulation to boost its profits between June and December 2009, the agency alleged. It said the firm made up more than 70 per cent of Nasdaq's total trading volume in the stocks involved in the final seconds of trading. The complexity of the SEC's investigation meant that it took time for the case to be brought, SEC Enforcement Director Andrew Ceresny told reporters in a conference call.
They were the first fraud and market-manipulation charges against a firm engaged in the super-fast electronic trading that now dominates the U.S. securities markets.
Athena's conduct "went to the heart of the integrity of the stock market," Ceresny said. Retail investors could have been disadvantaged by the artificial increases or decreases in stock prices through trading in their investment or retirement funds, he said.
New York-based Athena neither admitted nor denied the allegations under the settlement with the SEC, but it did agree to refrain from future violations of the securities laws.
Censure brings the possibility of a stricter sanction if the alleged violation is repeated.
While not denying the allegations, Athena said in a statement that it believes its activity helped the market by injecting cash to grease the wheels of trading at a time it was greatly needed. The firm said it stopped using the algorithm in question several years ago.
"Athena fully co-operated with the investigation from the start," the statement said. "Athena is pleased to settle this matter on reasonable terms and put this matter behind it."
A series of market disruptions in recent years have heightened concerns about the impact of increasingly complex super-fast computers and algorithms, which now account for a majority of stock trading volume. The so-called high-frequency trading firms look to get a jump on competitors by using computers to analyze market data, and executing buy and sell orders in milliseconds.
Regulators have put the trading systems under close scrutiny. Earlier this year SEC Chair Mary Jo White outlined new proposed rules that would, among other things, curb aggressive short-term trading tactics when the market is especially volatile. Another federal agency, the Commodity Futures Trading Commission, has been moving toward reining in high-speed trading.
Volatility has been on display in the stock market in recent weeks. On Wednesday, Wall Street was gripped by a dizzying swoon as investors fled stocks and poured money into bonds. The Dow Jones industrial average dropped 460 points in afternoon trading, all three U.S. stock indexes were in negative territory for the year, and the so-called fear index spiked.
The FBI confirmed earlier this year that it has been conducting criminal investigations of high-speed trading firms.
Although Athena is a relatively small firm, with less than $50 million in assets under management, the SEC said it dominated the market in the final seconds of a trading day for stock that it normally traded only slightly.
"When high-frequency traders cross the line and engage in fraud, we will pursue them as we do with anyone who manipulates the markets," White said in a statement.