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    This article originally appeared on TabbFORUM at and is reproduced here with the author’s permission

    By Theo Hildyard

    Unlucky flash boys could soon be wearing orange, as getting thrown into prison seems to be a new side-effect of recent regulatory crackdowns on financial services.

    Market regulators are now being pushed aside by heavy hitters, with the UK’s Serious Fraud Office only one short step behind the US’s Federal Bureau of Investigation in looking into high-frequency trading, currency market manipulation, dark pools and other murky areas of financial markets trading.

    In March – at about the same time Michael Lewis’s book “Flash Boys” was released, claiming the high-frequency trading game was rigged – the FBI jumped feet first into the HFT melee. The FBI said it wanted to determine whether HFT equates to front running or insider trading.

    Then, in July, the SFO inserted itself into an investigation of possible manipulation of the $5.3 trillion foreign exchange market. It joined the US Department of Justice, which, along with the UK Financial Conduct Authority, had already launched investigations into whether currency benchmarks such as the WM/Reuters 4 p.m. London fix were being manipulated.

    Regulators have long been criticized in the past for not having the firepower to chase or catch sophisticated fraudsters. They lacked the money, staff and technology to catch the perpetrators, as well as the authority to effectively prosecute them. They were not carrying big enough sticks, in other words.

    But the FBI and SFO carry the bigger sticks, being heavy-duty law enforcers with the staff and wherewithal to get to the bottom of fraud and manipulation. Not only that, they have the power to prosecute, which in some cases could mean jail for the actual traders involved.

    Regulators, for the most part, only have the power to fine banks for bad behavior. But the fines in the past have been dwarfed in comparison to the profits garnered by years-long market manipulation. (The one exception was regulators’ fines for JPMorgan Chase’s “London Whale,” where the bank was fined $920 million for LOSING $6 billion in a credit derivatives double-down bet. Losses in a publicly traded company are harder to hide than subtle market shenanigans.)

    Until three to five years ago, banks were willing to risk the fines, knowing that the profits far exceeded the penalties. Today, traders and compliance officers alike need to adjust to the new world order.

    With law enforcement agencies – experienced in chasing organized crime – watching financial markets, the game just got more dangerous. Changes to corporate culture, practices and technology are needed or more people will end up in prison. And not everyone looks good in orange.

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