As part of his Insider Trading 2.0 investigation, Attorney General Eric Schneiderman is scrutinizing services like that offer high-speed traders the ability to profit from information before other investors see it.
Specifically, Schneiderman is probing HFT's access to more in-depth market data feeds, higher bandwidth, faster cable connections and colocation, a practice which allows Wall Street banks and high-speed traders to place their computer-driven strategies in data centers closer to the exchange's matching engines.
Firms pay thousands of dollars per month to install their algorithms in these data centers.
Love how aggressively @AGSchneiderman is going after Wall Street shenanigans. reminds me of another AG I was a big fan of.— Sean Basinski (@SeanBasinski) March 21, 2014
But evicting high-speed traders from exchange data centers is a futile task, according to Mark Gorton, who is managing director of New York-based hedge fund Tower Research and Lime Wire, a music sharing service.
Gorton told Bloomberg that they will "find space in a data center that's across the street."
Schneiderman is also cracking down on the sales of proprietary market data feeds that provide richer information to subscribers. Speed-conscious trading firms pay thousands of dollars a month to the New York Stock Exchange and Nasdaq OMX to subscribe to specialized direct data feeds that don't go through the slower, industry-standard infrastructure. Exchanges contend that such data feeds and colocation services are made available to everyone who can pay for it.
Gorton told Bloomberg, "He seems to be upset that there are computers in markets."
However, a spokesman from the AG's office clarified that the Schneiderman is not against computers – he favors reigning in predatory practices of HFT while keeping their liquidity.
"He doesn’t understand the role played by professional traders." --Tower Research's Mark Gorton on NY AG Schneiderman http://t.co/leR9npo3xy— Nick Baker (@inkbacker) March 19, 2014
Schneiderman's announcement about curbing HFT's unfair practices this week may have drawn another Wall Street firm into the conversation. On Thursday, Gary Cohn, co-president and chief operating officer of Goldman Sachs, published an op-ed piece in the Wall Street Journal, titled, “The Responsible Way to Rein in Super-Fast Trading.”
Citing multiple technology failures that have occurred in the equity markets, Cohn suggests specific measures “to limit the risk and instability,” caused by the fragmented, complex equity market structure, which is amplified by speed of execution. He calls for “stronger safety net of controls" to cope with sophisticated routing algorithms, constant software updates and an explosion in electronic order instructions.
On the HFT front, Cohn favors applying regulatory fees to the participants that generate excessive message traffic. Even though big Wall Street firms like Goldman subscribe to the faster proprietary feeds, Cohn’s piece surprisingly agrees with the NY AG’s position on market data. “Public market data should be disseminated to all market participants simultaneously,” wrote Cohn, suggesting that exchanges should not provide proprietary feeds that are disseminated fractions of a second faster. ”Reducing the possibility of differentiated channels for market data also reduces incentives that favor investment in the speed of one channel over the stability and resiliency another,” wrote Cohn.
The timing of Schneiderman launching a broad investigation coincidentally comes one week after Virtu Financial, a high-frequency trading firm and electronic market maker, filed an IPO to raise $100 million, which reportedly could rise to $250 million. In the S1 document, Virtu revealed that out of a total of 1,238 trading days,(from Jan. 1, 2009 through Dec.31, 2013), it only had one losing day.
In the prospectus, Virtu attributes these results to its “real-time risk management strategy and technology.” It also explains, "we generate revenue by buying and selling large volumes of securities and other financial instruments and earning small bid/ask spreads." During the press conference, Schneiderman said that high frequency trading firms “appear to trade with no risk.” Meanwhile, the anti-HFT blogging site Zero Hedge chalks Virtu's profits up to an engrained system of front-running, and scalping fractions of pennies. It contends that Virtu’s too-good-to-be true financials are what attracted Schneiderman to open a broad investigation into whether exchanges and alternative trading venues (a.k.a. Dark pools) are providing privileges to HFT.
However, some bloggers are coming to the defense of HFT. Bloomberg View writer Matt Levine suggests the focus on a why HFT is still making money, shows a lack of understanding of the trading business. "Every firm that is in the trading business seems to make money on trading on a whole lot of days, and lose money on a whole lot fewer days," wrote Levine. The same has been said of firms like Morgan Stanley, Goldman and Citigroup, he wrote.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio