The illegal activity you're referring to are the bluffs? I'm under the impression most people have not successfully automated bluffs although I have heard of people manually doing it and using algorithms to exit or hedge. In my experience, most HFT does not intend to manipulate markets, maybe solely because this is difficult to automate and there's a lot of lower hanging fruit (not because they are altruistically abstaining from such behavior). It's difficult to automate bluffs because most HFT relies on backtesting and it's very hard to backtest high market impact strategies. In contrast, it is my impression manual traders can get very good at market manipulation.
There is a lot of shady stuff that goes on in trading due to conflicts of interest. Anyone intelligent or informed enough to know what's going on is financially incentivized to be secretive about it. I haven't gotten the impression the SEC is intentionally being incompetent- they really ARE just incompetent because anyone smart enough to realize what's happening does not join or remain in the SEC. Incompetence is the simplest explanation for the crazy rules and fines they have enforced, and the rules obvious to actual traders that they have ignored.
There is a lot of shady stuff that goes on in trading due to conflicts of interest. Anyone intelligent or informed enough to know what's going on is financially incentivized to be secretive about it. I haven't gotten the impression the SEC is intentionally being incompetent- they really ARE just incompetent because anyone smart enough to realize what's happening does not join or remain in the SEC. Incompetence is the simplest explanation for the crazy rules and fines they have enforced, and the rules obvious to actual traders that they have ignored.