After 20 years as investment advisors, Rich Gates and his partners at TFS Capital decided to close their West Chester, Pa., business last year. Gates had figured as one of the whistle-blowers in Flash Boys, Michael Lewis’ exposé of high-speed trading. But performance was poor in the mutual and hedge funds that TFS ran, Gates says, and investors lost interest. Now, the liquidation of the funds is being hindered by a problem that we thought Wall Street had fixed years ago.

At the start of this decade, Gates’ funds shorted some...