Maybe It Takes a Prosecutor…



Before dawn this morning Bloomberg News reported that New York’s top law enforcer, Attorney General Eric Schneiderman, is broadly looking into issues of fairness in our stock market. The AG is specifically concerned that stock exchanges and dark pools alike are catering to high-volume and profitable (for the trading venues) HFT firms by offering them enhanced data feeds and tools that effectively give them access to  trading, and trading information, before the general public.


This broad inquiry comes on the heel of the AG’s taking on BusinessWire for distributing corporate earnings reports and announcements milliseconds ahead of releasing them to the public. BusinessWire has, as a direct result of the AG’s action and the publicity created by it, decided to voluntarily cease selling such reports to high speed trading firms.


Schneiderman today will deliver a speech at a conference at New York Law School that will drive his concerns home:


“This new breed of predatory behavior gives a small segment of the industry an enormous advantage over all other competitors and allows them to use new technologies to reap huge profits based on unfair advantages,” according to a draft of Schneiderman’s speech to be delivered today at New York Law School.”


Our own Joe Saluzzi will also be speaking at that very conference, and will deliver our perspective of a distorted and broken market structure – concerns we have been voicing for over five years, including in our book Broken Markets.


The HFT Lobby still proclaims that HFT lowers transactions costs by decreasing spreads and increasing volume and confidence in the market environment. Modern Markets Initiative’s Peter Nabicht is quoted in the Bloomberg article:


“Speed of decision-making and execution, often associated with high-frequency trading, gives traders more confidence in their interaction with the market, which allows them to efficiently make more competitive prices” and better meet investor demands, Nabicht said.


While their lobbying initiative, which includes the services of two ex-presidential image advisors – Kevin Madden and Erik Smith, has helped them place very flattering pieces in major market media, such as this NPR piece two weeks ago that portrays HFT firms as relaxed and un-scary, AG Schneiderman has concerns.


We can only guess that the good Attorney General has read our 2010 white paper about Exchanges and Data Feeds – Data Theft on Wall Street. We can only guess that he has also been researching latency arbitrage in dark pools as well, which was the topic of a 2009 white paper we released – Latency Arbitrage – The Real Power Behind Predatory High Frequency Trading. We can only assume he has spoken to folks at places like IEX, to get additional insight on the practices. And we can only assume he has seen the real evidence on spreads, such as this long term chart on stock spreads that show little decline, and perhaps recent increases, since 2008:

S&P500 Spreads.png-large


We are happy that another branch of government is looking into issues of fairness in our stock market. After all, the SEC has been looking into these issues since as far back as 2009 – with little resulting action (2009 Dark Pool proposal anyone?).


The Bloomberg Article detailing AG Schneiderman’s efforts must be scary for HFT firms and the SEC alike. It points out how even the SEC is conflicted:


Regulator’s Dilemma


Cox, the Duke Professor, said New York’s attorney general is the only law enforcement body or regulator likely to target the exchanges. “The SEC wants to protect investors, but also strengthen and promote U.S. capital markets,” Cox said. “These twin functions conflict with each other, which is why they have so far turned a blind eye on this issue.”


Where will the AG’s inquiries take him? Perhaps stock exchanges and dark pools (and their creation of special data feeds, accommodations, and order types) will recognize the long-term absurdity of amplifying Broken Market Conflicts of Interest and Distortions, even if such policies help them ramp up profits in the short run.