This post was written by Amy Greer.
Recently, I had the opportunity to moderate a panel hosted by the Pennsylvania Bar Institute on which Daniel M. Hawke, the Chief of the SEC’s new Market Abuse Unit and Regional Director of the SEC’s office in Philadelphia, participated. Dan and I worked together for several years, while I was at the SEC, where I served as Chief trial counsel for the Philadelphia Regional Office. It was a pleasure (and really quite a coup) that he, and Elaine Greenberg, who heads the Municipal Securities and Public Pensions Unit and is the Associate Regional Director for Enforcement of the Philadelphia Office and also a former colleague, agreed to come and speak about their new national positions and the current focus of the Agency. Dan and Elaine head two of the five new specialized subject matter units created at the Division of Enforcement, focusing a lot of attention on the SEC’s Philadelphia Office.
The Market Abuse Unit focuses on investigations involving large-scale market abuses such as organized insider trading networks as well as other market manipulation and trading violations. One can expect that future cases brought by the unit may be similar to the SEC v. Galleon insider trading case currently under way. During the discussion, Dan described the Market Abuse Unit as conducting trader-based investigations, instead of reviewing trading on a security-by-security basis. Much of the Unit’s initial detective work depends heavily on computers and the development and deployment of automated trading data analysis. Dan explained that focusing only on securities is too limited to effectively capture improper trading. By focusing on traders, the Market Abuse Unit can look for patterns and relationships across securities to proactively uncover market abuse and trading violations.
However, perhaps even a trader-based analysis is too narrow in light of the “flash crash” that occurred in the stock market on May 6, 2010. The Dow Jones Industrial Average fell nearly 1,000 points causing many companies to trade at unreasonably low levels before the market recovered that same day. While the causes of the “flash crash” still elude regulators, the SEC has taken a strong interest in uncovering the origins of the “flash crash” and preventing future anomalies.
During the discussion, Dan acknowledged that when the market crashed on May 6th, he realized the focus of his Unit was still too narrow. He explained that the Market Abuse Unit must focus on market structure as well. As Dan explained, the Market Abuse Unit will need to specialize on such topics as Regulation National Market System (“Reg NMS”), market fragmentation, un-displayed liquidity and dark pools, high frequency and algorithmic trading, direct market access providers, and related issues. Such specialization will allow the unit to analyze, for instance, a fragmented market with over 50 exchanges to uncover where improper conduct may be occurring.
So how will this new initiative at the SEC’s Market Abuse Unit affect traders and trading practices? At the very least, we can expect this new Unit’s proactive approach and desire to expand its focus will cultivate more knowledgeable and savvy attorneys within the SEC’s Enforcement Division. What’s more, the SEC will now be on the lookout for more advanced and harder to detect market abuse schemes, not just across traders but, between fractured and fragmented markets as well. With all of these changes, one thing is certain, Dan Hawke and his Market Abuse Unit intend to be just as creative and knowledgeable as the traders they investigate.