Athena Capital Research, LLC, a New York City-based high-frequency trading firm, settled charges brought by the Securities and Exchange Commission for allegedly engaging in manipulative trading activities from June through December 2009 known as “marking the close.”
According to the SEC, Athena designed and employed computer algorithms—internally known as “Gravy”—that enabled it to make large purchases or sales of NASDAQ-listed stocks just prior to the exchange’s 4 p.m. close. These orders were placed each day after the exchange first publicized the net order imbalance in each stock 10 minutes prior to the end of trading. This indicator advised the market whether there were more buy orders than sell orders or more sell orders than buy orders for each stock and by how many shares.
Ordinarily the market price would be expected to move in the direction of the imbalance. For example, if the imbalance showed substantially more buy orders than sell orders, the market price would be expected to rise prior to the close, or fall, if there were more sell orders than buy orders.
The SEC claimed that, after learning of the imbalance, Athena would place a large imbalance-only-on-close order that was meant to take advantage of the perceived market conditions (for example, placing an order to sell securities when the imbalance reflected a predominance of buy orders). Athena then would execute orders in the opposite direction of its close order in the few seconds prior to the close (so-called “accumulation orders”), to improve its potential close order execution price, according to the Commission.
The majority of Athena’s accumulation orders were placed in the final two seconds of each trading each day, said the SEC, and the firm’s trades overall exceeded 70 percent of the total NASDAQ trading volume of relevant stocks just prior to the close.
Athena’s objective, charged the SEC, was for the price of its imbalance-only-on-close order fill to be superior to the average price of its accumulation orders executions and to be flat in each stock by the end of the day. According to an email by an Athena manager included by the SEC in its complaint,
[w]e have a desired accumulation pattern which includes grabbing stock at the beginning, a period of ‘average price’ accumulation, and a crescendo at the end.
Athena also modified its algorithm over time, claimed the SEC, to enhance its priority over other orders that might be placed on the close by other traders.
To settle the SEC’s complaint, without admitting or denying any of the Commissions findings, Athena agreed to pay a fine of US $1 million. The firm also agreed to be censured and committed not to violate the relevant provision of law and SEC regulation in the future. There were no requirements of disgorgement or any other trading prohibitions.