The (Questionable) Legality of High-Speed Pinging and Front Running in the Futures Market
Institutional investors complain that high-frequency trading (HFT) firms engage in high-speed "pinging" and 'front running" of their orders for trades. By sending out lightning fast "ping" orders for trades that operate much like sonar does in the ocean, HFT firms can detect when institutional investors will make large trades in futures contracts. Once a large trade has been detected, an HFT firm rapidly jumps in front of the institutional investor, buying up the liquidity in the contract and selling it back at higher or lower prices (depending on if it was a buy or a sell order). None other than Warren Buffett's right-hand man has called the HFT practice "evil" and "legalized front running." While many criticize these HFT tactics, they accept their legality at face value. But what if that understanding is incorrect? This Article posits that some high-speed pinging tactics violate at least four provisions of the Commodity Exchange Act-the statute governing the futures and derivatives markets-and one of the regulations promulgated thereunder. The better approach is not to view high-speed pinging as a form of front running or insider trading, but as analogous to disruptive, manipulative, or deceptive trading practices, such as banging the close (submitting a high number of trades in the closing period to influence the price of a contract), spoofing (submitting an order for a trade with the intent to immediately cancel it), or wash trading (self-dealing, or taking both sides of a trade), all of which are illegal.
Scopino, Gregory, "The (Questionable) Legality of High-Speed Pinging and Front Running in the Futures Market" (2015). Connecticut Law Review. 276.