[ by Howard Haykin ] High-frequency trading firms have attracted the attention of U.S. regulators, who are conducting inquiries in search of evidence that would validate whether or not these firms are distorting market prices by conducting transactions with themselves, according to 2 people with knowledge of the matter. So-called wash trades, ... in which a party buys a contract from itself, could be executed inadvertently by firms with multiple algorithms active in the same stock or derivative, said the people, who requested anonymity.  Such trades, which can alter the price of shares if they are executed above or below market rates, would be illegal if deemed intentional efforts to manipulate stocks. The SEC and CFTC have sharpened their focus on high-frequency and algorithmic trading since the Flash Crash of 5/6/10, when about $862 billion in stock values was erased in 20 minutes, before share prices recovered from the plunge. Regulators have expressed concern that some firms and electronic exchanges don’t have sufficient controls to prevent a range of events - e.g., improper trades or programming glitches - that could roil markets even when there is no wrongdoing. High-frequency trading, ... in which computer algorithms are used to buy and sell stocks in fractions of a second, accounts for more than 50% of equity trading volume.  Among the biggest automated-trading firms are: Getco LLC and Citadel LLC, both based in Chicago, and New York-based Virtu Financial LLC. Nasdaq OMX Group and NYSE Euronext are 2 Exchange operators that have started services to help firms avoid accidental wash trades. ‘Undesirable Executions’. BATS Global Markets updated a service on its 2 exchanges last month to help users avoid "undesirable executions against themselves."  Direct Edge Holdings began a similar service on two exchanges in 2010 to prevent "the potential for (or the appearance of) ‘wash sales’ that may occur as a result of the velocity of trading in today’s high-speed marketplace," according to a filing with the SEC. "Regulators cannot assume that algorithms in the markets are always well-designed, tested and supervised," CFTC Chairman Gary Gensler said at a June 20 meeting of the agency’s technical advisory committee.  "To give hedgers and investors the confidence in markets that they really need and deserve, I think regulators always need to adapt." Before Formal Rulemaking. The CFTC has been considering issuing a so-called concept release prior to a formal rulemaking, which could lead to new testing, supervision and oversight requirements for high- frequency and automated trading.  At a meeting of a CFTC advisory committee on June 20, representatives from Getco, NYSE Euronext, and Deutsche Bank AG suggested that regulators adopt a broad definition of high-frequency trading to limit the potential for regulatory arbitrage. "We wanted to keep it easy to interpret and difficult to game," Deutsche Bank’s Greg Wood said at the meeting.  "We deliberately did not want to define types of high-frequency trading strategies." Requiring registration and audits of automated trading algorithms would be a waste of regulators’ resources because of the cost and complexity of establishing unique identifiers, a working group of the CFTC advisory committee said in a summary of its findings presented at the meeting. "Market abuse is not fundamentally a function of the means, speed or frequency of order entry and transactions," according to the summary.  "Focus should be on specific behaviors that undermine market integrity irrespective of the means or pace of order entry." For further details, go to:   [Bloomberg, 6/22/12].