Towards Bipartisan Regulation of

High Frequency Trading

J OHN M ERRIMAN S HOLAR

Stanford University
CS 181W: Computers, Ethics, and Public Policy
Final Paper
June 7, 2017

Executive Summary
High frequency trading (HFT), which has existed in the United States for
several decades, expanded rapidly and in relative secrecy in the early 2000’s,
with total industry revenue exceeding $7 billion in 2009 [8]. Firms that
engage in HFT rely on incredibly fast software and network connections
to exchanges, and use these capabilities to trade stocks rapidly and often
aggressively. Considerable debate exists over the role of HFT firms – some
allege that their practices are anticompetitive and exploitative, while others
cite their ability to bolster liquidity, with both government regulators and
private companies on both sides of this debate. Though several reforms
have been enacted by organizations such as the SEC, many have failed to
curve abusive trading tactics and have harmed liquidity in the process.
This report analyzes both the role of HFT firms as well as previous
attempts to regulate them, and develops a fiscally bipartisan solution: tax
subsidies for “fair” exchanges together with an experimental securities
transaction tax, designed to limit exploitative trading without placing
undue burden on financial markets.

1
Introduction
In the introduction to his book Flash Boys, author Michael Lewis describes
a $300 million project by Spread Networks to lay a perfectly straight cable
connecting datacenters outside New York and Chicago, designed to re-
duce transmission time from 17 milliseconds to 13 milliseconds [11]. While
such an improvement may seem unimportant at first glance, the first 200
users to sign up for access to the Spread Networks cable paid a collective
$2.8 billion [20]. These users were primarily companies that engaged in
high-frequency trading (HFT), for whom 4 milliseconds was the difference
between dominance and irrelevance. To an outsider, this furious compe-
tition for milliseconds and even microseconds appears to be a waste of
resources, but it is in reality a race for very real money: high frequency
trading generated $7 billion in revenue in the US alone in 2009 [8].

Technical Background
Definition
High frequency trading is a subset of automated trading, in which financial
transactions are issued by computers without direct human input. HFT
specifically is characterized by large numbers or orders and cancellations,
short holding periods, low latency times (often on the scale of millisec-
onds or microseconds), and a focus on highly liquid instruments (that is,
instruments that are easily bought and sold) [8].

History
1930-2009: Emergence
HFT in its current form was born with NASDAQ’s introduction of purely
electronic trading in 1983 [6], which allowed for communication orders of
magnitude faster than was previously possible. The industry grew rapidly,
reaching its peak in 2009, when trades made using HFT software comprised
60% of all equity trading in the United States [8].

2
2009-Present: Decline and Maturity
HFT has declined slightly since 2009 (today comprising only 50% of all
equity trading), though by no means disappeared, for several reasons:

1. HFT is inherently predisposed to profit from high market volatility -

a condition that characterized the financial crisis of 2009 but has since
diminished. [16]
2. HFT also relies on high market volume, which has diminished along
with investor confidence in the wake of two shocks to the market
since 2009: the Flash Crash of May 6, 2010 (in which the Dow Jones In-
dustrial Average dropped 600 points in the span of 5 minutes) [9] and
the Knight Capital meltdown in August 2012 (in which Knight Capi-
tal lost $440 million dollars in a single day due to faulty automated
trading code) [15].
3. HFT was considerably more lucrative when practiced in relative
secrecy by a select few. Once knowledge of these practices became
public knowledge (starting with a New York Times article in 2009
[7]), increased competition in the sector normalized once-tremendous
profits.

Though HFT has seen a decline both in share of market volume and total
revenue since 2009, it still remains a billion-dollar sector, and one that could
reemerge in an inevitable period of greater volatility.

High Frequency Trading Strategies

The potential reemergence of HFT necessitates an understanding of the
practices employed in the sector, both during its 2009 heyday and today.

Co-location
Co-location is the practice of “locating computers owned by HFT firms ... in
the same premises where an exchanges computer servers are housed,” with
the goal of enabling faster access to exchange data. Co-location “has become
a lucrative business for exchanges, which charge HFT firms millions of
dollars for the privilege of ‘low-latency access”’. Co-location and privileged

3
Figure 1: Graphs showing the relative decline of high-frequency trading
since the financial crisis of 2009. In the graph on the right, dark blue
bars indicate European markets, while light blue bars represent American
markets. Source: Deutsche Bank Research [8]

low-latency can create a market of haves and have-nots, where the resource
in question is not money directly, but rather speed, which begets money
[17].

Front-Running
The term “front-running” has several different uses. Here, we use it to refer
to a practice by which an HFT organization recognizes a trade occurring
on one exchange and quickly acts to take advantage of that trade before it
can occur on another exchange. An example timeline is:

1. Investor I places an order for 100 shares of stock S, which is currently

valued at $20.00. This order is divided into 4 orders for 25 shares of
stock S, each of which is sent to a different exchange, W, X, Y, Z. Until
one of these trades reaches its exchange, knowledge of this movement
is unknown to the public.
2. Investor I’s order on exchange W is executed, and is broadcast to
the public. Investor I has longer latency to exchanges X, Y, Z: these
orders have not yet executed.

4
 3. HFT organization H notices investor I’s order on exchange W and
suspects that they might make similar trades on other exchanges.
Using their faster connection and lower latency, they quickly place
orders on exchanges X, Y, Z. They purchase the stock for $20.00 per
share.
4. Investor I’s orders arrive at exchanges X, Y, Z. Investor I’s demand
on these exchanges raises the price to $20.01 per share.
5. HFT organization H quickly sells these shares, making a profit of
$0.01 per share. With sufficient volume, H can make a considerable
profit.

Under current law, this practice is legal, though questionably ethical.

“Front-running” in most cases refers to the practice of using “material,
nonpublic information” to predict and exploit market movement (e.g. a
CEO who knows that his company’s earnings report will be low, and sells
shares ahead of a probable drop in share value). However, because the
variety of front-running described in the example relies only on public
information, it cannot be prosecuted under this framework [17].
Front-running is similar to “slow market arbitrage,” in which rather
than targeting a particular transaction on a particular exchange, an HFT
organization will simply monitor the value of instruments on different
exchanges for a price difference. When a price difference is present, the
firm can exploit the arbitrage opportunity, buying at the lower price and
selling at the higher price.

Spoofing
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-
Frank”) defines spoofing as “the illegal practice of bidding or offering with
intent to cancel before execution.” Spoofing was a technique employed
by HFT organizations to create the illusion of supply or demand for a
particular financial instrument, in an attempt to manipulate prices to their
advantage. Spoofing occurred regularly until it was banned under Dodd-
Frank in 2010, and still occurs in limited amounts today [13].

5
Technical Conclusions
High frequency traders employ a variety of techniques to manipulate fi-
nancial markets to their advantage, generating on the order of $1 billion
of revenue annually. Though the sector has declined with growing eco-
nomic stability, its still-considerable magnitude demands understanding
and regulation.

Public Policy Background

Arguments Supporting HFT
Market Quality
A report from the Congressional Research Service (CRS) recounts how
surveys suggest that “HFT appears to have narrowed bid ask spreads,
bolstered market liquidity, reduced some measures of price volatility, and
improved the price discovery process.” [18]
The process by which HFT bolsters market liquidity is apparent: HFT
firms make money by interacting with financial markets, and thus are
constantly trading, ensuring that other market participants will have a
partner with whom they can trade.
HFT firms can reduce market volatility through tactics which attempt
to rapidly buy and sell a particular financial instrument: because HFT
firms buy low and sell high on a very short time span, they exert down-
ward pressure on too-high prices and upward pressure on too-low prices,
acting as a stabilizing influence. Here, the CRS is careful to differentiate
between “aggressive” and “passive” HFT, noting that “passive as opposed
to aggressive HFT strategies [tend] to reduce intraday volatility.” [18]
The CRS is also careful to note that “correlation is not necessarily causa-
tion: various changes in equity market structure from developments such
as decimalization ... [and others] ... likely also played roles and it is hard to
disengtangle their individual roles.” [18]

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Arguments Against HFT
Lack of Dependable Liquidity
While HFT firms do create liquidity, some question their dependability,
noting that “high-frequency trades... generally lack depth because of the
relatively small size of HFT quotes [trade quantities].” [18] Additionally,
many HFT firms are not designated market makers (DMMs). DMMs have
an obligation to make a market (that is, buy and sell at market price) in
some security, even if this might mean operating at a loss. Because HFT
firms have no such obligation, the liquidity they provide can vanish under
certain conditions.

Unfair Markets
Practices such as front-running do not constitute insider trading, because
they do technically rely on public information. However, the ability to
use this public information relies on millions of dollars of technology and
privileged access via co-location. While it is true that these opportunities
for the fastest possible access to financial information are available to any
organization willing to pay for them, the barrier to entry is sufficiently
high so as to create a two-tiered market, in which some organizations have
access to information before others do, giving them an advantage.
Defenders of this system note that “securities markets have always been
characterized by differential or tiered access to securities trades, going back
to a time when floor traders had favored access to stock orders.” [18] Even
today, these defenders assert, the public doesn’t view people who use free
stock quotes via Google Finance (normally up to 20 minutes behind mar-
kets) as being “disadvantaged” with respect to people who use stock quotes
via paid services such as Bloomberg (normally within seconds of live mar-
ket movement). Rather, the public acknowledges that the Bloomberg user’s
advantage is the result of their decision to purchase access to Bloomberg’s
services [14]. However, critics assert that this argument is simplistic, and
that because investment in millisecond-level improvement is generally only
profitable for HFT firms, paid access for extremely low latency can and
does create tiered access to information.

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Investor Confidence
HFT may also be detrimental to investor confidence. To those in the finan-
cial industry not directly involved in the development of HFT technology,
the sector is a black box, with algorithms producing trading activity that
may be difficult for humans to analyze or explain. However, these financial
analysts may recognize that they cannot understand and master every
concept within the industry, and decide to “leave HFT to the HFT people.”
However, even if financial analysts place their trust in HFT professionals,
the general public is far less likely to do so, especially in light of a string
of highly public market disruptions that were (correctly or incorrectly)
attributed to reckless practices by HFT firms, the most notable among
these being the Flash Crash of May 6, 2010 and the Knight Capital Group
meltdown [9] [15]. Investor confidence is vital to any economy, as high
investor confidence means that the general public is willing to place their
financial resources in the hands of capital markets. If HFT “black boxes”
play a role in reducing investor confidence, they impede capital markets,
making it more difficult for people and businesses in need of loans to
acquire them and thus slowing economic growth.

Government Regulation Surrounding HFT

Much of the current regulation surrounding HFT in the United States has
been put forth by the United States Securities and Exchange Commission
(SEC), whose mission is “to protect investors, maintain fair, orderly, and
efficient markets, and facilitate capital formation.” [5] SEC initiatives to
date have been directed primarily towards increasing the accountability of
HFT firms.

Market Information Data Analytics System (MIDAS)

To improve its ability to monitor HFT firms for abusive and illegal trading
practices, the SEC has implemented programs including MIDAS (Market In-
formation Data Analytics System). MIDAS was adopted in 2013 to capture
all orders, modifications, cancellations, and trades conducted on national
exchanges, as well as off-exchange executions, providing the organization

8
with an unprecedented ability to aggregate trade data and monitor HFT
firms (and other market participants) for abusive behavior [2].

Large Trader Reporting Rule (LTRR)

In 2011 the SEC adopted the Large Trader Reporting Rule (LTRR), which
“requires large1 traders to identify themselves to the SEC, which ... [assigns]
each trader a unique identification number.” This number is used by
broker-dealers to maintain transaction records for each large trader, which
can be accessed by the SEC upon request. The LTRR provides another
method by which the SEC can monitor the practices of HFT firms to ensure
accountability [3].

Private-Sector Opposition to HFT

In addition to expected government regulation from the SEC and others,
opposition to HFT has come from another, more unexpected source: the
private sector. For strategic or ethical reasons, multiple financial companies
have taken stances against HFT, most notably IEX - the Investors Exchange.
IEX is a stock exchange created by former Royal Bank of Canada (RBC)
analyst Brad Katsuyama. After determining that he had been the unknow-
ing target of HFT front-running (during an era in which few people outside
of HFT firms knew these tactics existed) during his tenure at RBC, Kat-
suyama and his team searched for countermeasures. Initial attempts (such
as software that would ensure that all issued trades arrived at different
exchanges at the time same, preventing front-running) met limited success.
Searching for new solutions, Katsuyama and his team began to conceive
of a design for a new stock exchange - one that would prevent predatory
tactics by HFT firms. IEX’s solution to a market dominated by speed was
to introduce a speed bump in the form of a 38-mile fiberoptic cabled coiled
in the server room of their stock exchange, meaning that any traffic inter-
acting with the exchange would have to pass through this cable an incur a
1 Large traders here are defined by the SEC as “entities who trade either 2 million shares

or $20 million during any calendar day; or 20 million shares or $200 million during any
calendar month” [3]

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350-microsecond delay - too short to affect normal trading, but long enough
to prevent front-running [10].
Surprisingly, IEX, an exchange dedicated to the idea of prudence and
fairness in financial markets (perhaps at the cost of efficiency) received
the support it needed from Goldman Sachs - a bank frequently associated
with “moral bankruptcy” (see “Why I Am Leaving Goldman Sachs”, by
Greg Smith [19]) and the imprudent lending practices that led to the 2009
financial crisis.2 With the backing of a large investment bank, IEX was able
to meet operating costs and thrive, and today facilitates the exchange of
over 100 million shares per day [1].

Conclusions on Policy
The significant scope of the positive and negative effects of HFT on financial
markets necessitates an understanding of a financial sector that for many
years profited from operation in relative secrecy. The industry’s potential
to increase market efficiency by raising liquidity and stabilizing prices
cannot be overlooked. However, the tendencies of HFT to create unreliable
liquidity, foster tiered information access, and reduce investor confidence
must also be considered. Finally, the factions in the debate surrounding
HFT must be taken into account: the existence of public and private sector
opponents and proponents means that policy could take multiple forms.
Responses could consist of direct regulation (e.g. via the SEC), or could
instead be intended to influence the industry using the private sector as a
proxy (e.g. via tax incentives).

Public Policy Recommendations

Thus far, this report has provided unbiased background information on
the technology and public policy surrounding high frequency trading.
2 Goldman’s decision should be interpreted as strategic rather than magnanimous -
the firm engages in a variety of financial services, most notably investment banking and
investment management, and did not have a strong footing in HFT when IEX opened in
2013. The fact that Goldman began recruiting heavily for its own HFT division “Sigma X”
seems to reinforce this hypothesis. [12]

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Having established this factual basis, this report will discuss and develop
recommendations for further public policy surrounding HFT.

An Apolitical Argument Against HFT

Debate surrounding public policy and HFT is inextricably tied to the con-
siderably more complicated debate surrounding the relative merits and
detriments of different economic systems, and which of these systems
is best for a country such as the United States. Too often, discussions
surrounding financial legislation can be reduced to differing underlying
economic philosophies, issues on which few legislators and pundits are
willing to compromise their beliefs. This report will avoid such unpro-
ductive discourse by considering debate around HFT from both fiscally
liberal and fiscally conservative perspectives, representative of most of the
spectrum of economic philosophy in the United States.

The Fiscally Conservative Perspective

Moderate fiscal conservatism in the United States generally holds that
little government intervention in the market is preferable, and that a lack
of regulation results in higher profits, which incentivizes businesses to
enter the market, innovate, and create value. While under this system of
thought little regulation is preferable, some is necessary: fiscal conservatism
acknowledges the existence of negative externalities (e.g. a factory polluting
a nearby river) that will not be regulated by the free market, and thus must
be regulated by government.
One central component of fiscal conservatism is that companies unfet-
tered by regulation and taxation are better able to create value and create
a more prosperous country for citizens, reducing the need for social pro-
grams. Examining HFT under this lens begs the question: do firms that
engage in high frequency trading create value?
Is there value in “spoofing” – creating large-volume trades to manip-
ulate market prices, profiting off of that shift, and canceling the original
trades before they can be executed?
Is there value in “front-running” the trades of market competitors –
seeing their trades on one market, and exploiting that knowledge before

11
those trades arrive milliseconds later at another market?
These techniques are designed to exploit an advantage held by HFT
firms over other market participants, and are intended to extract profit
without creating value. Thus, under fiscally conservative philosophy, these
practices are unproductive and even actively harmful to an economy, and
should be restricted.
It is important to qualify this claim: under a fiscally conservative per-
spective, not all tactics practiced by HFT firms should be restricted. This
argument has taken a stand against aggressive, exploitative techniques by
HFT firms, but takes no such stand against passive techniques, such as
simple market-making. Creation of liquidity by market-making HFT firms
promotes efficient exchange and fosters access to capital markets, both of
which are core goals within a fiscally conservative framework.

The Fiscally Liberal Perspective

Fiscal liberalism begins with a philosophical basis somewhat orthogonal
to that of fiscal conservatism, but, counterintuitively, arrives at the same
conclusion.
Moderate fiscal conservatism in the United States generally holds that
the ability of the free market to regulate itself is limited, and that some
substantial level of government intervention is necessary for a healthy
economy. Fiscal liberalism asserts that a lack of regulation allows and
encourages companies to engage in practices that treat consumers and
other market participants unfairly. Under this system of thought regulation
and relatively high taxation to fund social programs are necessary and
helpful, but the free market still has the potential to create value and should
be allowed to operate with some degree of autonomy.
Abusive practices such as spoofing and front-running by HFT firms
are exactly the kind of harmful practices that fiscal liberalism asserts that
businesses will pursue in the absence of sufficient regulation - these prac-
tices are tantamount to millions of daily instances of legalized microtheft.
Under fiscal liberalism, government regulation of this sector is necessary to
prevent HFT firms from gaining a permanent and cyclically reinforced ad-
vantage in financial markets, one which will lead to monopolistic structures
and hinder competition and growth.

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Partisan Cohesion and Dissonance
Surprisingly, fiscal conservatism and fiscal liberalism can be applied to
derive the same conclusion condemning more aggressive measures by HFT
firms such as spoofing and front-running. However, one area where the
two philosophies exhibit dissonance is in their treatment of more passive
measures, such as market-making. Fiscal conservatism would support low
taxes for market makers, to encourage unfettered exchange, while fiscal
liberalism would levy higher taxes on market makers, under the assertion
that the corresponding increase in government revenue would more than
offset the small inefficiency introduced by a tax.
Thus, the most pertinent questions in crafting a bipartisan solution
become how best to discourage more abusive, aggressive practices by
HFT firms outright, and how to reconcile conflicting perspectives on the
necessity of regulation and taxation on passive HFT tactics.

Potential Measures
In its report on the subject, the Congressional Research Service considers
several potential legislative responses to the proliferation of HFT. This essay
considers them in turn, along with its own proposals [18].

Congressional Research Service Proposals

Order Cancellation Fees The CRS considers “imposing penalty charges
for excessive order cancellations,” a practice which would discourage HFT
traders from “posting orders they do not intend to execute or using cancel-
lations as part of manipulative strategies like spoofing.” This proposal is
countered by the argument that HFT firms must rapidly adapt to market
conditions in order to provide liquidity, and that this adaptation often in-
volves the rapid cancellation of orders that were genuine (that is, intended
to be executed, and not an instance of spoofing) when they were placed.
Under this proposal, it is possible that HFT firms would be more hesitant
to place trade orders, reducing liquidity.

13
Minimum Order Exposure Times The CRS also considers a scheme un-
der which “submitted securities orders could not be canceled for some
minimum duration, for example 50 milliseconds”. This proposal meets
discourse similar to that surrounding order cancellation fees: proponents
cite its potential to eliminate abusive practices, while critics cite its potential
to reduce the ability of market makers to provide liquidity.

Securities Transaction Tax Finally, the CRS considers placing a tax on

HFT trades specifically, similar to one implemented by Italy in December
2013 [4]. The Italian legislation created a tax of 0.02%, which “applies to any
portion of changed or canceled daily orders where the ratio of the changed
or canceled orders less than half a second in duration exceed 60% of the
total number of submitted orders.” Importantly, the tax “does not apply
to market makers.” As the tax was recently implemented, its merits are
still being evaluated. However, as with the previous two proposals, debate
centers on whether such a proposal excessively limits liquidity.

Novel Proposals
Tax Incentives for Fair Exchanges Observing that all measures issued by
the CRS become bogged down in debates regarding the potential impact
of such legislation on market liquidity, this report explores policy which
would have insubstantial impact in this respect: tax incentives for “fair”
exchanges, such as IEX. Fair exchanges eliminate many of the problems
associated with aggressive HFT practices, such as front-running, without
the need for hard-to-enforce legislation. Tax incentives for exchanges that
promote fair trading (or, conversely, tax penalties against firms that refuse
to implement such policy) promote fair markets without limiting the ability
of HFT firms to offer liquidity.

Limited Action Finally, one “non-proposal” is to consider taking very

limited or no action in response to HFT. This proposal points to the fact that
HFT has been in relative decline since 2009 (see “2009-Present: Decline and
Maturity” and figure 1). This is a valid possible response, but it ignores the
fact that HFT has declined primarily as a result of increasing market stability
since the 2009 financial crisis, and additionally ignores the possibility of

14
a resurgence in a future period of financial instability. Nonetheless, this
proposal contributes the valuable insight that HFT is not as powerful a
sector as it once was, and that regulation should adjust accordingly.

Recommendation
Having examined proposed public policy in response to HFT, and con-
structed public policy of our own to remedy potential pitfalls in pre-existing
proposals, we make the following recommendations.
First, as noted in “Tax Incentives for Fair Exchanges”, we recommend
the implementation of tax benefits for exchanges such as IEX which imple-
ment policies that promote fair market exchange. These policies do not
pose a financial burden on HFT firms, allowing them to provide liquid-
ity; simultaneously, these policies will help curb aggressive and harmful
trading practices such as front-running.
Additionally, we recommend the experimental, gradual, and mild in-
troduction of a securities transaction tax, with the understanding that this
introduction must be conducted carefully because it will reduce market
liquidity to some extent. This legislation recognizes a tradeoff between
promoting liquidity and limiting unproductive HFT tactics and proposes
experimentation with acceptable points on that tradeoff by varying the
securities transaction tax as appropriate, to find an acceptable balance
between the two objectives.

Conclusion
As the technological, political, and financial landscape around high fre-
quency trading grows ever more complex, it is important to develop and
test policy that appropriately responds to this growing complexity. With
prudent regulation, the government should strive to strike a bipartisan
balance between creating healthy free markets and restricting unhealthy
trading tactics, to promote long-term economic stability in this sector and
throughout the American economy.

15
Word Count
The body text of this essay (not including headings, footnotes, captions,
references, or the glossary) is 4000 words.

Significant Revisions
As this is the final submission of this essay, the course staff have requested
a summary of significant revisions from the first draft. My significant
revisions were as follows:

1. Removal of redundant paragraph in the introduction, which simply

repeated information from the executive summary.
2. Numerous small edits to clarify potentially confusing financial jargon,
or provide context around financial discussion where needed.
3. Numerous edits to reduce verbosity throughout.

Author’s Note
This essay attempts to the maximum possible extent to avoid overcompli-
cated financial jargon. Nonetheless, some discussion of concepts that may
not be accessible to readers from other fields is necessary. As such, we
provide this glossary for terms that may be unfamiliar to all readers.

Glossary

Ask Price The price at which a financial instrument can

be bought.

Bid Price The price at which a financial instrument can

be sold.

16
Bid-Ask Spread The difference between the bid price and the
ask price. That is, the difference between the
price that investors are willing to pay for an
instrument and the price that other investors
are willing to sell it for.

Colocation The practice of location computers owned

by trading firms in the same premises where
an exchange’s computer servers are housed.
Colocation allows for the fastest possible
communication with an exchange.

Exchange A private company that hosts financial trans-

actions as a service. Traders submit orders to
an exchange, and the exchange pairs buyers
with sellers to facilitate transactions. Exam-
ples of exchanges include the New York Stock
Exchange (NYSE), NASDAQ, and IEX.

Front-Running The practice of recognizing trades from a

high-latency trader on one exchange, and us-
ing low latency to anticipate those trades on
other exchanges. Front running is legal in
the United States, as legislation around it is
difficult to define precisely.

HFT Firm High Frequency Trading Firm. A firm that

engages in high-frequency trading.

Insider Trading Insider trading is buying and selling of a se-

curity by someone who has access to material,
nonpublic information about the security. Here,
material means “of meaningful value.”.

17
 Latency The time that it takes a market participant to
communicate with an exchange. For firms
that engage in high-frequency trading, low
latency is extremely important.
Liquidity A term used to describe how easily an asset
can be converted to cash. A highly liquid
instrument is easily bought and sold.

Price Discovery The process by which the value of a security

is established through market supply and
demand dynamics.

Security A fungible, negotiable, financial instrument

that holds some type of monetary value. Ex-
amples of securities include stocks, bonds,
and options.
Slow-Market Arbitrage A practice in which trading firms with low-
latency access to multiple exchanges monitor
identical or correlated assets for price differ-
ences on the different exchanges, and con-
duct arbitrage for risk-free profit when the
opportunities arises.
Spoofing The practice of submitting a large number of
buy or sell orders with the intent to cancel
them before they are executed, normally to
create the illusion of supply or demand in or-
der to manipulate financial markets to one’s
advantage. Spoofing is illegal in the United
States under Dodd-Frank.

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