A high-frequency trading firm in New Jersey, Panther Energy Trading, will pay a $3.1 million fine and give back over a million dollars in profits gained from manipulating commodity prices in fuel and agricultural markets. The fine is minuscule relative to the size of overall manipulation in such markets, according to recent news reports, but the way Panther profited calls attention to the risky and exploitative nature of high-frequency trading (HFT).
Panther’s head trader, Michael Coscia, used the computer programs that drive the HFT firm’s business to rapidly issue and then cancel purchases of commodity futures, regulators say. Futures trades are essentially wagers on what a given item’s market price will be at a certain date, and Coscia’s scheme inflated the prices of futures he wished to sell, allowing him to pocket profits. Recent investigations and reporting have revealed that traders are rigging prices in similar ways for everything from oil to foreign currency to complex financial products known as derivatives.
But Panther’s HFT business model puts this instance of price rigging in a different light. Regulators quoted by CNN Money were careful to state that “forms of algorithmic trading are of course lawful” and “an important and commonplace part of the markets nowadays,” yet the scheme illustrates how HFT practices undermine financial markets’ relationship to the “real economy” of goods and services. A recent study of a common form of HFT found it harms the average investor and skews markets to the benefit of speculators. Computers that execute thousands of trades each second make markets volatile and can lead to “flash crashes” such as the 2010 episode where the Dow Jones Industrial Average lost and then regained 600 points in just a few minutes during afternoon trading.
The harmful nature of HFT has some calling for a small Financial Transactions Tax, which would make even the legal-but-harmful forms of high-speed speculation less profitable without seriously impacting more traditional investors. While business leaders and economists say such a tax is a good idea, efforts to introduce it in the U.S. Congress and among European authorities have met stiff resistance from high-frequency trading firms. In America, firms have thrown a lot of money at lawmakers recently, increasing their campaign donations by 673 percent from 2008 to 2012.