New York Attorney General (AG) Takes Steps to Restrict High Frequency Trading

May 12th, 2014

Following the release of Michael Lewis’ new book, Flash Boys, the media, Congress and regulators have been abuzz about the relatively unregulated world of high frequency trading.  The Securities and Exchange Commission (SEC), Commodity Futures Trading Corporation (CFTC), Department of Justice (DOJ) and Federal Bureau of Investigations (FBI) have all begun investigations into high frequency trading; however, New York AG Eric Schneiderman is spearheading the effort as the first player to take concrete and public steps.  The issue is also gaining traction on Capitol Hill, where Washington heavy weights, such as Barney Frank, former Chairman of the House Financial Services Committee and co-author of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), are calling for congressional oversight and hearings into the practice.

The New York AG’s office began its initiative to prevent “Insider Trading 2.0,” as it is calling it, in February and March, but has recently taken additional steps.  Barclays, Goldman Sachs and Credit Suisse received requests for information last week.  In general, AG Schneiderman is looking into activities occurring in each financial institution’s dark pool and whether high-speed trading firms were granted unfair access into these pools to gain a competitive advantage over other traders.

Following agreements with Business Wire and Marketwired earlier this year, the AG has secured yet another agreement with PR Newswire to discontinue the provision of market data feeds to high frequency traders.  In a situation where high frequency traders can front run and take advantage of market participants with a mere millisecond head start, restricting market data can have a real impact on curbing the behavior.

These initial state-level steps to gain information into financial institutions’ operations and cut off resources to high-speed trading firms are just the beginning of what promises to be a long, drawn out, federal campaign to combat high frequency trading.  These restrictions are likely to evolve into regulations and these requests for information are likely to evolve into congressional hearings, lawsuits and enforcement actions.

While the United States (US) is still in the preliminary stages of reigning in high frequency trading, the European Union (EU) has acted relatively quickly. On April 15, 2014, the European Parliament approved new legislation to curb high frequency trading by restricting the smallest price increments for securities and requiring testing of trading algorithms to identify any behavior mimicking front running.  The new legislation will modify the Markets in Financial Instruments Directive (Mifid), and require the European Securities and Markets Authority to promulgate more than 150 regulations. The legislation must now be approved by individual EU member states. Two and a half years after approval the law will take effect.

 

Read more:

Michael Lewis, Flash Boys:  A Wall Street Revolt – http://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393244660

New York AG Announcements:

o    http://www.ag.ny.gov/press-release/ag-schneiderman-announces-unprecedented-steps-news-distribution-firm-curb-preferential

o   http://www.ag.ny.gov/press-release/ag-schneiderman-announces-marketwired-agreement-end-sales-news-feeds-high-frequency

o   http://www.ag.ny.gov/press-release/ag-schneiderman-calls-new-efforts-eliminate-unfair-advantages-provided-trading-venues

o   http://www.ag.ny.gov/press-release/ag-schneiderman-applauds-decision-business-wire-prohibit-high-frequency-traders

Press Coverage:

o   http://online.wsj.com/news/articles/SB10001424052702303701304579551444213360678?mod=WSJ_hp_LEFTWhatsNewsCollection