NEW YORK - The technological arms race among professional equity traders threatens to destabilize U.S. markets and more should be done to limit their speed, according to New York Attorney General Eric Schneiderman.
Schneiderman, whose office is examining privileges marketed to high-frequency firms such as enhanced data feeds, said Michael Lewis’ Flash Boys will help focus attention on the debate. The new book says speed traders are rigging the U.S. market to make tens of billions of dollars.
“I would not be quite as hyperbolic as that,” Schneiderman said in an interview with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s Market Makers program. “The race for speed is inherently dangerous. That leads people to take more and more chances to try and get an advantage, and that could lead to destabilization.”
Schneiderman’s inquiry could disrupt a model that market regulators have permitted for years as high speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them shave millionths of a second off transactions.
“We celebrate technology, but we have speed limits and air bags,” said Schneiderman, adding that the Securities and Exchange Commission is taking a “hard look” at high frequency trading. Reining in market excesses is important “because we have lost a lot of credibility,” he said. “A lot of investors do not have confidence in the market.”
Lewis, a columnist for Bloomberg View, is adding his voice to a debate that has obsessed the securities industry for almost a decade while only periodically surfacing in public through events such as the May 2010 flash crash, in which the Dow Jones industrial average posted an almost 1,000-point loss.
“The United States stock market, the most iconic market in global capitalism, is rigged,” Lewis, whose books Liar’s Poker and The Big Short highlighted Wall Street excesses, said during an interview on 60 Minutes on Sunday. “It’s crazy that it’s legal for some people to get advance news on prices and what investors are doing,” he said.
Everyone who owns equities is victimized by the practices, in which the fastest traders figure out which stocks investors plan to buy, purchase them first and then sell them back at a higher price, said Lewis.
High-frequency trading comprises a diverse set of software-driven strategies that spread from U.S. equity markets to most developed countries as computer power grew and regulators tried to break the grip of centralized exchanges. They usually employ super fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies on more than 50 public and private venues that make up the American equities market.
Firms using the tactics account for about half of share volume in the U.S., a statistic that shows their pervasiveness and hints at the obstacles faced by proposals to rein them in. Exchanges rely on high-frequency traders for profits as well as liquidity, with electronic market makers all but eliminating the old system of human floor traders who oversaw the buying and selling of equities. While critics such as Lewis see a Wall Street plot, proponents say the new system is faster and cheaper.
In the U.S., the biggest high-speed traders include Virtu Financial Inc., which filed in March to sell shares to the public. Bats Global Markets Inc., the Lenexa, Kan.-based equity exchange that merged with Direct Edge Holdings this year, was founded by a high-frequency trader.
Eric Ryan, a spokesman for the New York Stock Exchange, and Nasdaq OMX Group Inc.’s Rob Madden declined to comment on Lewis.
“We completely disagree with allegations that the U.S. equity market is rigged,” Bats President Bill O’Brien said in an email Sunday. “While we should never stop trying to improve our market structure, it is unfair and irresponsible to accuse people simply because they use technology and enhance competition. This has helped make our market the most competitive and liquid in the world, greatly benefiting individual investors.”
Business, Pages 27 on 04/02/2014