On October 16, in a groundbreaking trading manipulation case, the Securities and Exchange Commission entered an Order instituting a settled administrative proceeding against high-frequency trading firm Athena Capital Research, LLC (Athena). The SEC claimed that from June through December 2009, on almost a daily basis, Athena engaged in a practice called “marking the close,” buying or selling stocks shortly before the close of trading in order to push the market price and closing price. The SEC asserted that Athena used sophisticated algorithms and rapid trades to manipulate the closing price of tens of thousands of stocks to its benefit. Despite Athena’s relatively small size, as a result of its high-frequency trading strategy, its trades constituted 70 percent of the total NASDAQ trading volume of the affected stocks in the final seconds of the day. According to the SEC, Athena designed a strategy to exploit order imbalances, which occur when there are more on-close orders to buy certain shares than to sell them, or the converse. Shortly before close of trading, NASDAQ releases information regarding the size and direction of potential imbalances to encourage market participants to fill imbalances. Athena would typically fill the imbalance immediately after NASDAQ’s first imbalance message, and then engage in a series of rapid fire transactions on the opposite side of its order over the remaining minutes of the trading day. As a result, the SEC claimed Athena manipulated the prices of targeted stocks. These “manipulated” prices, in turn, were used by NASDAQ to set closing prices for on-close orders during its closing auction. Athena’s internal email communications, quoted in the SEC Order, indicated that the firm was aware that the strategy might raise regulatory concerns. For example, one manager emailed another after the firm received a regulatory alert, “let’s make sure we don’t kill the golden goose.”
Athena settled with the SEC and agreed to a censure, without admitting or denying the SEC’s finding of violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Athena also agreed to cease and desist from further violations and pay a $1 million penalty.