The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: High-Frequency Trading

  • From Vol. 11 No.28 (Jul. 12, 2018)

    Women in Derivatives Event Features Address by CFTC Chair Giancarlo and Panel Discussion on the Intersection of Technology and Regulation

    A recent program presented by Women in Derivatives featured opening remarks by CFTC Chairman J. Christopher Giancarlo that focused on the CFTC’s use of market data to gauge the impact of algorithmic trading on market stability, as well as a panel discussion that discussed cutting edge business and regulatory issues concerning blockchain technology, cryptocurrencies and artificial intelligence. Petal Walker, special counsel at WilmerHale, moderated the panel, which featured Chris Brummer, professor at Georgetown Law; Isabelle S. Corbett, senior counsel and director of regulatory affairs at software firm R3; Amy Davine Kim, global policy director and general counsel at Chamber of Digital Commerce; and Sigrid Seibold, principal at KPMG US. This article summarizes the key takeaways from Giancarlo’s remarks, his responses to audience questions and the panelists’ insights. For more from Giancarlo, see “As Cryptocurrencies Advance, CFTC Commissioner Encourages Formation of an SRO to Oversee Customer Protection” (May 31, 2018); and Virtual Currencies Present Significant Risk and Opportunity, Demanding Focus From Regulators, According to CFTC Chair” (Feb. 8, 2018).

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  • From Vol. 11 No.15 (Apr. 12, 2018)

    How Quant Funds Can Maximize Appeal to Investors While Minimizing Cyber and Regulatory Risk

    In the hyper-connected trading and investment world of 2018, quant funds, which utilize highly sophisticated computer-based models to automatically carry out trades, are gaining increasing appeal. As the lure of these funds grows, however, it is critically important for investors to understand the differences between quant funds and seemingly similar vehicles; the various investment strategies that they offer; and the numerous risks that come with this type of trading. Managers must also recognize that running a quant fund raises unique operational and marketing challenges, not least because of the extremely high standard of due diligence that many institutional investors are likely to apply before making allocations. Quant funds also face unique external problems; for example, luring and retaining talent in a tech world dominated by Silicon Valley presents certain difficulties. To help readers understand these issues, The Hedge Fund Law Report interviewed Ildiko Duckor, head of the emerging hedge fund manager program and co-head of the investment funds practice at Pillsbury in San Francisco. This article presents her insights. For more from Duckor, see “What Are Hybrid Gates, and Should You Consider Them When Launching Your Next Hedge Fund?” (Feb. 18, 2011). For commentary from another Pillsbury attorney, see “ALM General Counsel Summit Reveals How Hedge Fund Managers Can Prepare for SEC Examinations” (Nov. 19, 2015).

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  • From Vol. 11 No.13 (Mar. 29, 2018)

    Managing the Machine: How Hedge Fund Managers Can Examine and Document Their Automated Trading Strategies

    Over the past few years, financial regulators have been urging firms that execute automated trading (AT) strategies to implement policies and controls reasonably designed to prevent market disruption by that trading. The recast Markets in Financial Instruments Directive (MiFID II), which went into effect earlier this year, ushered in new restrictions for algorithmic traders. FINRA and several industry organizations have also begun to fill in the gaps on the U.S. equities side by issuing detailed guidance covering everything from pre-trade controls to system documentation procedures. Last, but not least, in November 2015, the CFTC proposed a new rule entitled Regulation Automated Trading (Regulation AT), which calls for the adoption of risk controls, transparency measures and other safeguards to strengthen the regulatory regime surrounding AT. In this two-part guest series, Douglas A. Rappaport and Elizabeth C. Rosen of Akin Gump outline five high-level first steps for legal and compliance professionals to design and implement a control framework tailored to a hedge fund manager’s AT program that will stand up to regulatory scrutiny. The first article covers steps one and two, including a discussion on how to conduct a risk assessment of and document the AT system. The second article explores the remaining steps, addressing protocols for monitoring and reviewing trading activity, source code and disclosures. While Regulation AT has not yet been adopted, this article remains required reading for any fund manager pursuing AT in light of the actions taken by other regulatory bodies, as well as the general expectation that those managers have policies and procedures tailored to the risks associated with that form of trading. For more on how MiFID II regulates AT, see “FCA Outlines U.K. and MiFID II Requirements for the Development, Testing and Operation of Algorithmic Trading Systems” (Mar. 1, 2018); and “ACA Panel Reviews Effects of Impending MiFID II on U.S. Advisers” (Dec. 7, 2017).

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  • From Vol. 11 No.9 (Mar. 1, 2018)

    FCA Outlines U.K. and MiFID II Requirements for the Development, Testing and Operation of Algorithmic Trading Systems

    The U.K. Financial Conduct Authority (FCA) has laid out relevant regulatory requirements and best practices for algorithmic trading in a recent report that highlights five key areas: the definition of algorithmic trading; the development and testing process; risk controls; governance and oversight; and market conduct. The report draws on reviews that the FCA conducted in anticipation of the implementation of the recast Markets in Financial Instruments Directive. “This report is relevant for all firms developing and using algorithmic trading strategies in wholesale markets. Firms should consider and act on its content in the context of good practice for their business,” said Megan Butler, FCA Director of Supervision – Investment, Wholesale and Specialist, in the FCA press release announcing the report. This article summarizes the report’s key takeaways. See our two-part series on managing automated trading strategies: “Examining and Documenting Strategies” (Jan. 7, 2016); and “Monitoring and Reviewing Strategies” (Jan. 14, 2016).

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  • From Vol. 11 No.7 (Feb. 15, 2018)

    Settlements With Three Major Banks and Five Individual Enforcement Actions Follow CFTC Anti-Spoofing Initiative

    The CFTC’s Spoofing Task Force has been aggressive in combating spoofing – placing orders that a trader has no intention of filling in order to move the price of a futures contract in a desired direction – as well as other forms of market manipulation. It recently announced eight separate actions involving spoofing and other manipulation. The CFTC entered into settlement orders with three major banks: Deutsche Bank AG and Deutsche Bank Securities Inc.; UBS AG; and HSBC Securities (USA) Inc. The regulator also commenced five civil enforcement actions against individual traders and a software developer. This article examines the details and terms of the bank settlements, as well as the complaints filed by the CFTC against the individuals. For more on spoofing, see “Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing” (Oct. 12, 2017); “Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing” (Sep. 7, 2017); and “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017).

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  • From Vol. 10 No.48 (Dec. 7, 2017)

    ACA Panel Reviews Effects of Impending MiFID II on U.S. Advisers

    A recent ACA Compliance Group (ACA) program examined the impact that the recast Markets in Financial Instruments Directive (MiFID II) will have on fund managers when it takes effect in January 2018, covering delegated portfolio management; market reforms; third-country managers; research payments; best execution; transaction reporting; marketing and product governance rules; recording of telephone conversations; algorithmic trading; and commodity derivatives. See also our two-part series “Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II”: Part One (Jun. 18, 2015); and Part Two (Jun. 25, 2015). The program featured Sally McCarthy and Martin Lovick, ACA director and senior principal consultant, respectively. This article summarizes the key takeaways from their presentation. For further insights from ACA, see “Challenges and Solutions in Managing Global Compliance Programs” (Oct. 5, 2017); and our coverage of its 2017 fund manager compliance survey: “Continued SEC Focus on Compliance, Conflicts of Interest and Fees, and Common Measures to Protect MNPI” (Jun. 1, 2017); and “Variety in Expense Allocation Practices and Business Continuity Measures” (Jun. 8, 2017).

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  • From Vol. 10 No.40 (Oct. 12, 2017)

    Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing

    Preventing and responding to market manipulation is one of the primary mandates of the SEC and CFTC, the latter of which recently entered into settlement orders with a bank and a day trader, alleging in each case that the respondents had engaged in spoofing – a manipulative practice by which a trader enters multiple orders for a given commodity or futures contract with no intention of executing them in order to move the price of that contract in a desired direction. This article analyzes the terms of the settlement orders, which were issued around the same time as the decision by the U.S. Court of Appeals for the Seventh Circuit in U.S. v. Coscia, which upheld the constitutionality of the anti-spoofing provision of the Commodity Exchange Act. See “Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing” (Sep. 7, 2017). For more on spoofing, see “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017); “Managing the Machine: How Hedge Fund Managers Can Examine and Document Their Automated Trading Strategies (Part One of Two)” (Jan. 7, 2016); and “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015).

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  • From Vol. 10 No.35 (Sep. 7, 2017)

    Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing

    On August 7, 2017, the U.S. Court of Appeals for the Seventh Circuit (Court) issued a ruling in a long-running case of a high-frequency trader charged with violating the anti-spoofing provision of the Commodity Exchange Act (CE Act) along with commodities fraud. The Court dismissed the defendant’s argument that the anti-spoofing provision of the CE Act was unconstitutionally vague and that a conviction based on the provision was therefore invalid. The case is of monumental significance for the financial sector because it is likely to embolden the government to pursue and prosecute traders it deems to have fallen afoul of the anti-spoofing provision. The implications of the case may be troubling for some traders who feel that, despite the Court’s finding, the legal definition of spoofing may need further clarification. Just as importantly, there are instances where traders, acting with no scienter or illegal intent, will legitimately cancel orders. Given the centrality of the cancellation of orders to regulators’ view of spoofing, traders need to take the utmost care to ensure that they can prove their normal market activities did not amount to illegal market manipulation and fraud. To help readers understand the issues that came to light in the Court’s ruling, and to inform them about steps they can take to insulate legitimate trading activities from suspicions of spoofing and disastrous legal consequences, this article summarizes the ruling and presents insights from attorneys with expertise in anti-spoofing enforcement. For more on spoofing, see “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017).

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  • From Vol. 10 No.7 (Feb. 16, 2017)

    WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration

    Fund managers that trade futures, swaps and other derivatives may be subject to both CFTC and SEC supervision. A recent web briefing by regulatory and enforcement attorneys from WilmerHale provided a comprehensive review of significant enforcement and regulatory actions by the CFTC in 2016, considered pending CFTC legislation and regulation and offered insight into what CFTC operations and priorities may look like under the Trump administration. The briefing featured WilmerHale partners Paul M. Architzel, Dan M. Berkovitz and Anjan Sahni, along with special counsel Gail C. Bernstein. This article highlights the panelists’ key insights. For additional insight from WilmerHale attorneys, see “FCPA Concerns for Private Fund Managers (Part One of Two)” (May 28, 2015); “FCPA Risks Applicable to Private Fund Managers (Part Two of Two)” (Jun. 11, 2015); and “Best Legal and Accounting Practices for Hedge Fund Valuation, Fees and Expenses” (Jul. 18, 2013).

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  • From Vol. 9 No.2 (Jan. 14, 2016)

    Managing the Machine: How Hedge Fund Managers Can Monitor and Review Their Automated Trading Strategies (Part Two of Two)

    Although many hedge fund managers and other firms using automated trading (AT) strategies have relied on generic policies to comply with applicable regulations, with the advent of initiatives such as the CFTC’s Notice of Proposed Rulemaking on Regulation Automated Trading (Regulation AT) and restrictions on AT strategies imposed by MiFID II, that reliance will no longer be satisfactory. Rather, under Regulation AT and other guidance from self-regulatory and industry organizations, firms that use AT strategies must establish specific policies and controls to mitigate the particular risks associated with those strategies. In this two-part guest series, Douglas A. Rappaport, Patrick M. Mott and Elizabeth C. Rosen of Akin Gump outline five high-level first steps for legal and compliance professionals to jumpstart the process of designing and implementing a control framework tailored to a hedge fund manager’s particular AT program that will stand up to regulatory scrutiny. This second article explores the final three steps, addressing protocols for monitoring and reviewing trading activity, code and disclosures. The first article covered the first two steps, including conducting a risk assessment of and documenting the AT system. For additional insight from Rappaport, see “Perils Across the Pond: Understanding the Differences Between U.S. and U.K. Insider Trading Regulation” (Nov. 9, 2012). For insight from other Akin Gump partners, see “Non-U.S. Enforcement, Insider Trading in Futures, Failure to Supervise Charges and Other Evolving Insider Trading Challenges for Hedge Fund Managers” (Nov. 21, 2013).

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  • From Vol. 9 No.1 (Jan. 7, 2016)

    Managing the Machine: How Hedge Fund Managers Can Examine and Document Their Automated Trading Strategies (Part One of Two)

    Financial regulators are urging firms to implement policies and controls to prevent their automated trading (AT) strategies from disrupting the markets. To wit: the CFTC recently proposed risk controls and other restrictions for certain market participants that use algorithmic trading systems. European firms will soon be subjected to similar restrictions for their algorithmic trading systems in all markets covered by MiFID II, including the equities markets. FINRA and several industry organizations have begun to fill in the gaps on the U.S. equities side by issuing detailed guidance covering everything from pre-trade controls to system documentation procedures. Consequently, all firms that use AT strategies must begin establishing policies and controls to mitigate risks associated with those strategies. In this two-part guest series, Douglas A. Rappaport, Patrick M. Mott and Elizabeth C. Rosen of Akin Gump outline five high-level first steps for legal and compliance professionals to jumpstart the process of designing and implementing a control framework tailored to a hedge fund manager’s particular AT program that will stand up to regulatory scrutiny. This article will cover the first two steps, including conducting a risk assessment of and documenting the AT system. The second article will explore the remaining steps, addressing protocols for monitoring and reviewing trading activity, code and disclosures. For additional insight from Rappaport, see “How Can Hedge Fund Managers Understand and Navigate the Perils of Insider Trading Regulation and Enforcement in Hong Kong and the People’s Republic of China?” (Mar. 28, 2013). For insight from other Akin Gump partners, see “Non-E.U. Hedge Fund Managers May Not Be Required to Comply With AIFMD’s Capital and Insurance Requirements” (Jul. 9, 2015); and “Structuring Private Funds to Profit From the Oil Price Decline: Due Diligence, Liquidity Management and Investment Options” (Mar. 19, 2015).

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  • From Vol. 8 No.49 (Dec. 17, 2015)

    E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider

    With regulatory authorities in the E.U. and elsewhere increasingly focused on market conduct, managing market abuse risks within hedge fund managers has become central to a firm’s culture of compliance.  For hedge fund managers trading on a cross-border (particularly a U.S.-E.U.) basis, divergent regimes make managing such risks more difficult.  In a guest article, Leonard Ng, co-head of the E.U. financial services regulatory group at Sidley, sets out some common scenarios faced by hedge fund managers and addresses how managers might wish to deal with them under the E.U. market abuse regime.  For additional insight from Ng, see “Sidley Austin, Ivaldi Capital and Advise Technologies Share Lessons for U.K. Hedge Fund Managers from the January 2015 AIFMD Annex IV Filing,” The Hedge Fund Law Report, Vol. 8, No. 12 (Mar. 27, 2015).  For insight from Ng’s partner, Will Smith, see “Potential Impact on U.S. Hedge Fund Managers of the Reform of the U.K. Tax Regime Relating to Partnerships and Limited Liability Partnerships,” The Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014); and our two-part series, “U.K. Disguised Fee Rules May Result in Increased U.K. Taxation of Investment Fees to Individuals Affiliated with Hedge Fund Managers”: Part One, Vol. 8, No. 15 (Apr. 16, 2015); and Part Two, Vol. 8, No. 16 (Apr. 23, 2015).

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  • From Vol. 8 No.43 (Nov. 5, 2015)

    SEC Release of Private Fund Statistics Illuminates Key Trends in Hedge Fund Industry

    The Risk and Examinations Office of the SEC Division of Investment Management recently released a compilation of Private Fund Statistics (Report) that provides data from filers of Form PF and Form ADV in 2013 and 2014.  In a recent speech, SEC Chair Mary Jo White said of the Report, “The public availability of aggregated information should help to address persistent questions, and to some degree misconceptions, about the practices and size of the private fund industry.”  Accordingly, the data in the Report helps identify trends within the hedge fund industry, allowing hedge fund advisers to benchmark themselves against their peers and competitors, as well as providing investors with information to refine their due diligence processes.  This article examines the Report, focusing particularly on data relevant to hedge funds and hedge fund advisers, including leverage and liquidity practices.  The SEC also issues an annual report on how it uses such data.  See “Report Describes the SEC’s Use of Form PF for Hedge Fund Manager Examination Targeting and Risk Management,” The Hedge Fund Law Report, Vol. 7, No. 38 (Oct. 10, 2014); and “SEC’s First Report on Initial Form PF Filings Offers Insight into How the Agency Is Using the Collected Data for Examinations, Enforcement and Systemic Risk Monitoring,” The Hedge Fund Law Report, Vol. 6, No. 34 (Aug. 29, 2013).

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  • From Vol. 8 No.25 (Jun. 25, 2015)

    Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II (Part Two of Two)

    As the Markets in Financial Instruments Directive is recast under the new directive (MiFID II) and related regulations (MiFIR), it is important for hedge fund managers and other firms to prepare for the changes taking effect in January 2017.  To assist in that effort, a recent program presented by The Hedge Fund Law Report and Advise Technologies offered a comprehensive overview of the proposed changes under MiFID II and MiFIR.  Moderated by William V. de Cordova, editor-in-chief of the HFLR, the program featured Jeanette Turner, a managing director at Advise Technologies, and Simon Whiteside, a partner at Simmons & Simmons.  This article, the second in a two-part series, addresses access to E.U. markets by non-E.U. firms; direct electronic access; investment advice; transaction reporting; transparency reporting; commodities; trading venues; and preparation for MiFID II.  The first article conveyed insight from the panel on the impact of MiFID II on private funds; the legislative and regulatory status of MiFID II; inducements, soft dollars and research; conflicts of interest; information and reporting; best execution; recordkeeping; and product governance.  For more on MiFID II, see “Changing Regulations May Restrict Hedge Fund Managers’ Use of Soft Dollars in Europe,” The Hedge Fund Law Report, Vol. 8, No. 24 (Jun. 18, 2015).  For a discussion by Turner of the MiFID II implementation process and new transaction reporting requirements, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).  For other collaborations between the HFLR and Advise Technologies, see also “Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 AIFMD Annex IV Filing (Part One of Two),” The Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015).

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  • From Vol. 7 No.47 (Dec. 18, 2014)

    Regulators from the SEC, CFTC and New York Attorney General’s Office Reveal Top Hedge Fund Enforcement Priorities (Part Two of Four)

    This is the second article in a four-part series covering this year’s edition of Practising Law Institute’s annual hedge fund enforcement event.  Participants at the event included regulators from the SEC, CFTC and New York Attorney General’s Office.  This article addresses CFTC enforcement concerns and cases, New York Attorney General’s Office initiatives and defense strategies for avoiding and managing government investigations.  The first article in this series discussed key points made by Julie M. Riewe, Co-Chief of the SEC’s Asset Management Unit, on enforcement trends, principal transactions, conflicts raised by side-by-side management, valuation, allocation of expenses and the potential deterrent value of smaller enforcement actions.  The third article in the series will focus on SEC inspections and examinations.  And the final article will provide instruction (based on points made at the PLI event) on how to establish an effective private fund compliance program.  See also “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).

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  • From Vol. 7 No.16 (Apr. 25, 2014)

    When Must a Hedge Fund Manager (or Its Current or Former Employees) Preserve Evidence in Litigation or Potential Litigation Involving High-Frequency Trading Code?

    Software is playing an increasingly central role in the investment processes of hedge funds, high frequency traders and other market participants.  Most of the growing body of law around trading software focuses on who owns it, when it has been stolen and the remedies for theft.  See “Recent Developments Affecting the Protection of Trade Secrets by Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).  There is less law, and less commentary, on the application of civil procedure to trading technology disputes.  Accordingly, a recent federal court decision is uniquely interesting to hedge fund managers and others that create and own trading technology; to technology and investment professionals that leave one shop to start another; and to lawyers and others professionally focused on intellectual property issues.  A technology-based trading firm asked the court to impose spoliation sanctions on former employees who allegedly stole code from the firm, incorporated versions of that code into the trading technology of a new firm then – while aware of litigation involving the code – destroyed or erased various iterations of the code.  In a carefully drafted opinion, the court applied the law of spoliation to this dispute involving trading software code.  The court’s opinion provides valuable guidance as to when, and to what extent, a duty to preserve electronic information pertaining to proprietary software exists and the criteria for imposing an appropriate sanction for spoliation.

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  • From Vol. 5 No.46 (Dec. 6, 2012)

    United Nations White Paper Explains How Hedge Fund Investors Can Layer Environmental, Social and Governance Factors into Manager Selection

    There has been a surge of recent interest in “responsible investment” in and by hedge funds.  However, the meaning of “responsible investment” is still being developed.  The term broadly refers to the integration of environmental, social and governance (ESG) investment criteria; and hedge fund managers are increasingly incorporating ESG factors into their investment strategies.  See “More Hedge Funds Are Employing Environmental, Social and Governance Investment Criteria,” The Hedge Fund Law Report, Vol. 4, No. 39 (Nov. 3, 2011).  However, there is little consensus on the impact of incorporating ESG criteria into hedge fund investments and strategies, or how to do so most efficiently and effectively.  In 2006, the United Nations (U.N.) Secretary-General launched the Principles for Responsible Investment (PRI), a set of aspirational standards designed to guide investors towards creating a sustainable global financial system that fosters good governance, transparency, integrity and accountability.  Hedge funds are important investment vehicles for many signatories to the PRI initiative.  To assist its signatories in their hedge fund investments, PRI recently issued a white paper discussing how hedge funds can incorporate ESG criteria into their investment strategies and how hedge fund investors can incorporate ESG factors into manager selection.  This article provides (1) an overview of PRI’s paper, including its assessment of the advantages and risks of various hedge fund investment techniques and strategies for ESG investors, and (2) a roadmap for responsible investment in and by hedge funds.

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  • From Vol. 5 No.17 (Apr. 26, 2012)

    Recent CFTC Settlement Highlights Regulatory Focus on Manipulation of Commodity Futures and High Frequency Trading

    On April 19, 2012, Chief Judge Loretta Preska of the U.S. District Court for the Southern District of New York approved a consent order detailing a settlement entered into among the U.S. Commodity Futures Trading Commission (CFTC), high frequency global proprietary trading firm Optiver Holding BV, two of its subsidiaries (collectively, Optiver) and three individual principals.  The settling parties were accused of manipulating the market for light sweet crude oil, New York harbor heating oil and New York harbor gasoline futures contracts.  This settlement demonstrates a renewed government emphasis on stamping out market manipulation in these markets.  While Optiver is a proprietary trading firm that utilizes high frequency algorithmic trading, as opposed to a hedge fund manager, the legal points raised by the action apply with equal force to hedge fund managers that trade commodity futures or that employ high frequency strategies.  For a discussion of a CFTC action brought against a hedge fund trader, see “Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts,” The Hedge Fund Law Report, Vol. 4, No. 30 (Sep. 1, 2011).  This article describes the complaint initially brought by the CFTC in 2008, the terms of the settlement and the stiff sanctions imposed on the defendants, including disgorgement, civil monetary penalties, trading restrictions imposed on Optiver and statutory bars imposed on each of the individual defendants.

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  • From Vol. 5 No.8 (Feb. 23, 2012)

    Trading Practices Session at SEC’s Compliance Outreach Program National Seminar Addresses Need for Holistic Compliance Procedures Dealing with Allocations, Best Execution and Cross Trades

    On January 31, 2012, the SEC hosted its annual, “Compliance Outreach Program National Seminar” (Seminar).  (The program was previously called “CCOutreach,” but it has been “rebranded,” as the SEC explained in a press release, to be more inclusive of all senior personnel at firms.)  The Seminar included five sessions.  The Hedge Fund Law Report recently reported on the session entitled “Enforcement-Related Matters” (Enforcement Session).  See “Enforcement Session at SEC’s Compliance Outreach Program National Seminar Highlights Regulatory Focus on Valuation, Conflicts of Interest and Compliance Shortcomings at Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  This article focuses on the “Trading Practices” session and highlights best practices for addressing the identified compliance concerns.

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  • From Vol. 4 No.40 (Nov. 10, 2011)

    Business Issues with Legal Consequences: A Wide-Ranging Interview with Dechert Partner George Mazin about the Most Important Challenges Facing Hedge Fund Managers

    The Hedge Fund Law Report recently had the privilege of interviewing George J. Mazin, a Partner at Dechert LLP, and a deservedly well-regarded member of the hedge fund bar.  As evidenced by the text of our interview, which is included in this issue of The Hedge Fund Law Report, George has an aptitude for identifying the legal consequences of business issues, and explaining them clearly.  He also has the kind of market color that only comes with years – decades – in the trenches, and experience across business cycles.  Our interview was wide-ranging, reflecting the diversity of George’s experience, which in turn reflects the range of legal issues relevant to hedge fund managers.  In particular, our interview covered: valuation considerations in connection with affiliate transactions; valuations based on fraudulent sales and rigged dealer bids; manager overrides of third-party valuations; whether side pockets remain viable in new hedge fund launches; how even non-ERISA hedge funds can analogize the ERISA model of independent pricing; effective valuation testing programs; the interaction between GAAP and the custody rule; GAAP exceptions to audit opinions; use of counterparty confirmations by the SEC; delayed audits; custody of derivatives and limited partnership interests; insider trading policies with respect to market chatter and channel checking; how to grant side letters in light of selective disclosure considerations; how algorithmic or high-speed trading firms can prepare for regulatory examinations; legal considerations in connection with loans from a hedge fund to a manager; best practices in connection with principal trades; and whether side-by-side investing by manager personnel can pass muster under fiduciary duty and related principles.  This interview was conducted in connection with the Regulatory Compliance Association’s Fall 2011 Asset Management Thought Leadership Symposium, which is taking place today at the Pierre Hotel in New York.

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  • From Vol. 3 No.24 (Jun. 18, 2010)

    Hedge Fund Managers Anticipate Higher U.S. Equity Trading Volumes in 2010, TABB Group Report Finds

    A recent report by financial markets research and strategic advisory firm TABB Group found that the hedge fund industry is poised for significant growth during the remainder of 2010 in terms of assets under management (AUM) and equity trading volumes.  The report, entitled “U.S. Hedge Fund Equity Trading 2010: Commissions, Volumes and Traders,” forecast that industry AUM will reach $1.8 trillion by the end of this year, and that equity trading volumes will rebound significantly from their credit crisis lull, augmented by an increased use of leverage.  In a recent webinar, Matt Simon, a TABB Group Analyst and author of the report, discussed the report and its findings.  This article summarizes those findings, which include: expected increases in hedge fund trading volumes; decreases in the number of execution traders on hedge fund trading desks; increases in use of dark pools, algorithms and direct market access (DMA) by hedge funds for equity trades; and anticipated increases in commissions for broker-dealers.

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  • From Vol. 2 No.44 (Nov. 5, 2009)

    U.S. Senate Subcommittee on Securities, Insurance and Investment Holds Hearing on Dark Pools, Flash Orders, High Frequency Trading and Market Surveillance

    Dark pools, flash orders and high frequency trading have received significant regulatory attention of late.  On October 21, 2009, the SEC proposed rule changes regarding dark pools.  Dark pools are electronic networks that facilitate trading of shares outside of traditional exchanges and give certain investors the ability to trade large blocks of shares without notifying the entire market of the transaction.  The proposed rules would require a greater proportion of stock quotes to be displayed and would restrict communication between dark pools.  The overall goal of the proposed rule changes is to push more orders onto publicly displayed markets.  The SEC also has recently proposed a ban on flash orders, a practice in which certain investors are privy to a quote for a short time before others can view that quote.  See “What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?,” The Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).  Finally, high frequency trading has been receiving significant attention of late, both from regulators and the press, broadly focusing on the question of whether the practice unfairly privileges traders with access to co-located computers on or near exchanges.  See “Does Europe Offer a More Hospitable Regulatory Environment for High Frequency Trading Than the United States?,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).  The recent regulatory attention on these topics was the backdrop for a hearing on October 28, 2009 hosted by the U.S. Senate Subcommittee on Securities, Insurance and Investment.  At the hearing, the Subcommittee heard testimony from regulators, industry participants and a fellow senator on, broadly, whether the current regulatory structure is up to the task of regulating the innovative, fast-evolving topics of dark pools, flash orders and high frequency trading.  The Hedge Fund Law Report attended the hearing, and this article summarizes the points discussed at the hearing of most pressing relevance for hedge funds.  Specifically, we offer significant detail on what was said, and what the tone and substance of the hearings may mean for regulatory developments in the near term with respect to dark pools, flash orders, high frequency trading and market surveillance.

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  • From Vol. 2 No.39 (Oct. 1, 2009)

    Does Europe Offer a More Hospitable Regulatory Environment for High Frequency Trading Than the United States?

    High frequency trading now accounts for the majority of all U.S. equity trades, and by most accounts has dramatically increased liquidity in a variety of markets.  Nonetheless, largely based on a conflation of high frequency trading and flash orders – practices that are related, but different in key ways – high frequency trading has received quite a bit of negative press of late.  On flash orders, see “What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?,” The Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).  One frequently adduced argument is unfairness: high frequency traders are said to have access to potent computers and powerful human resources, while lesser traders do not.  This may be true, but it’s not illegal (at least not yet).  Moreover, it is difficult to identify any reason why this would be less than ethical, or materially different from the informational asymmetries that have characterized trading markets at least since a group of brokers formed the New York Stock Exchange under a buttonwood tree on Wall Street in 1792.  High frequency trading remains a viable investment approach, and securities investing has incontrovertibly become a global business.  Accordingly, this article explores whether Europe offers a more hospitable regulatory environment for high frequency trading and high frequency traders than does the U.S.  It also addresses the practical and technological variations among the two jurisdictions.  The purpose of this article is to help hedge funds with a high frequency trading strategy answer the question: If I’m going to do this, where should I set up shop?  Or if I’ve already set up shop, what are the regulatory considerations of which I should be aware, and how may they change?  Most importantly, how will these regulatory considerations affect my trading profits and opportunities and my investments in technology and other resources?  In particular, this article examines what high frequency trading is, including how it interacts with flash orders, dark pools and multilateral trading facilities; the upsides and downsides of high frequency trading from the perspectives of hedge funds and regulators; regulation of high frequency trading in the U.S. and Europe; and the relative benefits and burdens (practical and regulatory) of the trading environments in both places.

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  • From Vol. 2 No.32 (Aug. 12, 2009)

    What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?

    While much ado has been made of flash orders in the news lately, little focus has been placed on the mechanics of flash orders, the legal and regulatory basis for flash orders, who is trading based on flash orders, and the benefits and downsides of flash orders for both investors and the market.  Because of the likelihood that the Securities and Exchange Commission (SEC) will take action to regulate or eliminate the use of flash orders, the debate over these issues is particularly relevant.  There is some question as to whether the SEC will amend current regulations to eliminate flash orders altogether, or whether additional requirements could be imposed on flash orders that would satisfy regulators’ needs for transparency while still leaving flash orders in place.  In addition, because hedge funds and other firms may have already invested in the technology necessary to execute flash orders or planned to invest in such technology, understanding the debate and the potential outcome of SEC regulation may enable hedge funds to allocate resources in light of likely regulatory outcomes.  This article offers a comprehensive overview and analysis of issues raised by flash orders, including: a description of what flash orders are; the legal basis for flash orders; recent challenges to flash orders from Senator Charles Schumer and the SEC’s response; the upside to hedge funds and others of flash orders; the downside; the likelihood of regulation and the shape such regulation may take; and the implications of the foregoing for hedge funds and their managers.

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  • From Vol. 2 No.28 (Jul. 16, 2009)

    Citadel Investment Group Sues Former Employees Alleging Violations of Non-Disclosure, Non-Solicitation and Non-Compete Agreements

    On July 9, 2009, Citadel Investment Group (Citadel) filed a lawsuit in the Circuit Court of Cook County, Illinois against three of its former employees – Mikhail Malyshev, Jace Kohlmeier and Matthew Hinerfeld – and Teza Technologies LLC, a corporation founded by those three former employees.  Citadel’s complaint alleges that the individual defendants violated non-disclosure, non-solicitation and non-complete covenants in their employment agreements with Citadel, as well as the Illinois Trade Secrets Act, by misappropriating trade secrets and other confidential data relating to Citadel’s high frequency trading technology.  We describe the factual and legal allegations in the complaint.

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