Regulating High-Frequency Trading: The Case for Individual Criminal Liability

Orlando Cosme, Jr. | January 1, 2019

The popular imagination of securities trading is a chaotic, physical stock exchange—a busy floor with hurried traders yelling, “buy, buy, buy!” While this image is a Hollywood and media favorite, it is no longer accurate. In 2019, most securities trading is conducted electronically on digital markets. One type of trading strategy, high-frequency trading, utilizes algorithms, data centers, fiber optic cables, and supercomputers to obtain an edge in the market. High-frequency trading has leveraged advancements in technology to constitute over half of all trading volume in a given day. High-frequency trading, however, has come under scrutiny in recent years as it has increased market susceptibility to certain forms of criminal conduct. In 2017, the U.S. Court of Appeals for the Seventh Circuit upheld the first conviction of a high-frequency trader for spoofing, a type of trader misconduct that is made more susceptible by high-frequency trading. While scholars have debated whether high-frequency trading should be regulated more than other types of trading and if so, what the regulations might look like, no one has analyzed criminal law as a vehicle to regulate high-frequency trading. This Comment makes the case that individual criminal liability is an ideal tool to regulate misconduct in the high-frequency trading space. Two features of high-frequency trading make the strategy particularly challenging to regulate: 1) it is difficult to draw a line between legitimate and illegitimate behavior in high-frequency trading; and 2) it is difficult to pinpoint an exact definition of what high-frequency trading is. Criminal liability has several advantages over civil liability with respect to these challenges. First, the mens rea component and higher standard of proof required in criminal liability will ensure that high-frequency traders found criminally liable engaged in illegitimate behavior with a higher degree of certainty. Second, the threat of criminal prosecution will better serve the goal of deterring high-frequency trader misconduct. Within the context of criminal liability, individual criminal liability is preferable to corporate criminal liability because the former better furthers the goal of deterrence. The identity problem that corporate liability helps to solve—in some corporate contexts it is impossible to pinpoint culpability on any single individual—is not an issue in high-frequency trading; and individual criminal liability is socially more preferable as a matter of policy. Accordingly, the government should increase criminal enforcement of high-frequency traders to promote its goal of safeguarding market integrity.