Quantitative trading programs, algorithms, SEC, FINRA investigations and trading halts:

January 21, 2024

Quantitative trading programs, algorithms, SEC, FINRA investigations and trading halts:

Quantitative trading programs and algorithms are computer programs that use mathematical models and data analysis to execute trades in the stock market. They can manipulate a stock price by creating artificial demand or supply, exploiting market inefficiencies, or spreading false or misleading information💀

Some examples of SEC and FINRA investigations on stock manipulation by quantitative trading programs and algorithms are:

In 2022, the SEC charged eight social media influencers with securities fraud for using Twitter and Discord to manipulate the prices of thousands of thinly traded stocks. They allegedly bought stocks and then promoted them to their followers, who drove up the prices and trading volumes. The influencers then sold their shares for a profit of approximately $100 million. The SEC is seeking injunctions, disgorgement, penalties, and penny stock bars against the defendants.

In 2019, the SEC charged 18 traders, mostly based in China, with securities fraud for using multiple accounts and spoofing techniques to manipulate the prices of over 3,000 stocks. They allegedly placed large buy or sell orders to create a false impression of market activity and then cancelled them before execution. They also traded among themselves to generate artificial volume and price movements. The SEC is seeking injunctions, disgorgement, penalties, and penny stock bars against the defendants.

In 2016, FINRA fined Credit Suisse Securities (USA) LLC $16.5 million for failing to prevent and detect potential market manipulation by its clients who used the firm's algorithmic trading platform. The firm allegedly did not have adequate systems and procedures to monitor the trading activity of its clients, who engaged in layering, spoofing, and other abusive practices. The firm also did not report suspicious transactions to FINRA as required. These are just some of the examples of stock manipulation by quantitative trading programs and algorithms.

The SEC can initiate different types of trading halts depending on the situation and the reason for the halt. According to the web search results from my tool, some of the common types of SEC trading halts are:

News Pending Halt: This type of halt occurs when a company has material news that may affect the price or trading of its securities, such as earnings reports, mergers and acquisitions, product launches, or regulatory actions. The SEC may halt trading in the security until the news is disseminated to the public and the market has time to digest the information.

Regulatory Concern Halt: This type of halt occurs when the SEC has concerns about the accuracy or adequacy of the information available about a company or its securities, such as financial statements, disclosures, or compliance with listing standards. The SEC may halt trading in the security until the company provides the necessary information or clarifies the situation.

Extraordinary Market Activity Halt: This type of halt occurs when the SEC detects unusual or suspicious trading activity in a security, such as significant price movements, volume spikes, or market manipulation. The SEC may halt trading in the security to protect investors and maintain fair and orderly markets.

Trading Suspension: This type of halt occurs when the SEC determines that a trading halt is not sufficient to address the issues or risks associated with a security or a company. The SEC may suspend trading in the security for up to 10 days and, if appropriate, take action to revoke the registration of the security.

These are some of the types of SEC trading halts that might be initiated in response to different scenarios. You can find more information and examples of SEC trading halts and suspensions on the SEC’s [Trading Halts and Delays] page and the [Trading Suspensions] page.

Stock halts are temporary suspensions of trading activity for a security, usually due to a significant event that could affect its price or value.

Some of the most famous companies that have experienced stock halts for manipulation are:

GameStop Corp. (GME): This video game retailer became the target of a massive short squeeze orchestrated by a group of retail investors on Reddit’s WallStreetBets forum in January 2021. The stock price surged from about $18 to over $480 in a matter of days, triggering several trading halts and volatility warnings.

Luckin Coffee Inc. (LK): This Chinese coffee chain was once hailed as the “Starbucks of China”, but it turned out to be a fraud. In April 2020, the company admitted that it had fabricated over $300 million in sales, sending its stock price plummeting by more than 80%. The Nasdaq halted trading in Luckin Coffee for over a month, before delisting it in June 2020.

Kodak (KODK): This iconic photography company received a $765 million loan from the US government in July 2020 to produce pharmaceutical ingredients amid the Covid-19 pandemic. The news caused its stock price to soar by more than 2,000% in two days, attracting the attention of regulators and lawmakers. The SEC and the US International Development Finance Corporation (DFC) launched investigations into possible insider trading and disclosure violations. The DFC also put the loan on hold, causing the stock price to collapse.