	Introduction

On May 6, 2010, the Dow Jones Industrial Average (DJIA), a broad stock index, fell by nearly 1,000 points over the course of several minutes and then quickly rebounded. Among them are whether (1) HTF plays a role in exacerbating market fragility; (2) it may heighten the market's systemic risk; (3) it enhances or harms the quality of the securities market; (4) certain kinds of HFT may constitute an illegal form of front-running; (5) HFT helps foster a system of two-tiered trading markets that benefits certain traders at the expense of others due to their access to faster trading data and advantageous trade infrastructure; and (6) the presence of HFT has been to the detriment of non-HFT investors and investor confidence in the securities market. Specifically, in the 113 th Congress, S. 410 (Harkin), H.R. 880 (DeFazio), and H.R. 1579 (Ellison) would levy taxes on various financial trades, including trades conducted by HFT traders. H.R. 2292 (Markey) would require the Commodity Futures Trading Commission (CFTC) to provide a regulatory definition of HFT in the derivatives markets that the agency oversees. The Department of Justice (DOJ), Federal Bureau of Investigation (FBI), CFTC, SEC, New York Attorney General, and Massachusetts Secretary of Commerce are variously conducting investigations and probes into specific HFT firms, certain HFT strategies, and HFT in general. In addition, the FBI is reportedly probing (1) whether HFT firms are trading ahead of other investors based on information that other market participants cannot see, a possible form of front-running, a type of illegal insider trading; (2) practices in which a HFT trader submits trade orders and then cancels them to foster the illusion of market activity, a possible form of market manipulation that may prompt others to respond to illusory trade orders; and (3) the use of HFT to place orders to hide transactions that may be based on an illegal tip. In June 2014, SEC Chair Mary Jo White made what was arguably the first explicit agency discussion of prospective HFT-related regulatory initiatives. Referencing HFT, however, she said she had concerns with "aggressive, destabilizing trading strategies in vulnerable market conditions." This report provides an overview of equities HFT and its potential economic and regulatory implications. It examines (1) recent developments regarding probes and investigations of HFT, (2) what equities HFT is, (3) the nature of the general equities HFT landscape, (4) how equities HFT works and who conducts it, (5) equity HFT's perceived benefits and disadvantages, (6) the Flash Crash of 2010 and the alleged role of HFT, (7) SEC programmatic and regulation-related initiatives to potentially monitor HFT and address its potentially negative market impact, (8) European Union HFT regulatory developments,; and (9) various domestic HFT regulatory ideas under discussion. Defining High-Frequency Trading

HFT is an imprecise "catchall" term that currently has no legal or regulatory definition. It is used to describe what many characterize as a subset of algorithmic trading (AT) largely associated with the sell side of the financial industry. Volatility . A separate criticism of HFT is that the liquidity provided is often fleeting and has been alternatively dubbed "phantom liquidity" or "flickering quotes." Such challenges have led to concerns that HFT may have helped increase the total trading costs of institutional investors. Another criticism is that HFT firms may engage in potentially manipulative strategies that involve the use of quote cancellations. A potential concern here is that because of this correlation, shocks that hit a small number of very active HFT traders could detrimentally affect the entire market. The earlier 1,000 point decline was historical, representing the largest one-day decline in the history of the DJIA. Mini-Flash Crashes

In the aftermath of the Flash Crash, several observers, including officials from the CFTC and Nanex, a market data provider, have said that so-called mini-crashes, significant and precipitous drops in the prices of individual securities that do not reach the level of the 2010 crash, appear to be fairly common and an ongoing feature of the market. The Large Trader Reporting Rule was adopted by the SEC in 2011. As in the equities markets, proponents of HFT in the futures markets have argued that the rise of HFT has tended to increase market liquidity and narrow bid-ask spreads, thereby reducing transaction costs. Such concerns have percolated in the press and among market participants and regulators.
High-frequency trading (HFT) is a broad term without a precise legal or regulatory definition. It is used to describe what many characterize as a subset of algorithmic trading that involves very rapid placement of orders, in the realm of tiny fractions of a second. Regulators have been scrutinizing HFT practices for years, but public concern about this form of trading intensified following the April 2014 publication of a book by author Michael Lewis. The Federal Bureau of Investigation (FBI), Department of Justice (DOJ), Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Office of the New York Attorney General, and Massachusetts Secretary of Commerce have begun HFT-related probes.
Critics of HFT have raised several concerns about its impact. One criticism relates to its generation of so-called phantom liquidity, in which market liquidity that appears to be provided by HFT may be fleeting and transient due to the posting and then almost immediate cancellation of trading orders. Another concern is that HFT firms may engage in manipulative strategies that involve the use of quote cancellations. In addition, some observers allege that HFT firms are often involved in front-running whereby the firms trade ahead of a large order to buy or sell stocks based on nonpublic market information about an imminent trade. Another criticism is that HFT has increased the level of potential market systemic risk whereby shocks to a small number of active HFT traders could then detrimentally affect the entire market. A related concern is whether HFT could exacerbate market volatility. These concerns have percolated since the "Flash Crash" of May 6, 2010, when the Dow Jones Industrial Average (DJIA) fell by roughly 1,000 points in intraday trading—the largest one-day decline in the history of the DJIA. The crash was analyzed in an investigative report by the SEC and CFTC which, among other factors, looked at the role HFT may have played. The report determined that HFT was not the cause but may have exacerbated the crash. Another area of criticism is that HFT often involves two-tiered markets in which HFT firms pay extra for the right to access data feeds or to collocate their servers within exchanges' servers—all of which is designed to give some traders an advantage over others.
HFT's supporters argue that the increased trading provided by HFT adds market liquidity and reduces market volatility. They contend that HFT is a technological innovation that is the latest evolutionary stage in a long history of securities market making and assert that HFT has reduced the bid-ask spreads in stock trading, thereby lowering trading costs.
Congressional interest in HFT and the Flash Crash has manifested itself in the 113th Congress both legislatively and in the congressional oversight of the SEC and CFTC. Legislatively, S. 410 (Harkin), H.R. 880 (DeFazio), and H.R. 1579 (Ellison) would levy taxes on various financial trades, including trades conducted by HFT traders. H.R. 2292 (Markey) would require the CFTC to provide a regulatory definition of HFT in the derivatives markets it oversees and require those who do HFT to register with the CFTC.
In June 2014, SEC Chairman Mary Jo White announced that in response to concerns over "aggressive, destabilizing trading strategies in vulnerable market conditions," the agency was pursuing several HFT-related reform proposals, including requiring unregistered HFT firms to register with the SEC.
This report provides an overview of HFT in the equities and derivatives markets regulated by the SEC and CFTC. It also examines the Flash Crash of 2010 and the role that HFT may have played as well as recent regulatory developments.