New York Attorney General Eric Schneiderman is taking aim at high-frequency trading, or what he calls “insider trading 2.0.”
As part of his effort to rein in the practice, the state’s top cop called for tougher regulations and market reforms intended to eliminate what he called the unfair advantages provided traders who use this method.
“High-frequency trading did not even really exist 10 years ago, but in some respects it’s coming to dominate our markets,” the lawman said in a speech at the New York Law School Center for Business and Financial Law. “And, unfortunately, our markets and market institutions have started to cater to these traders.”
High-frequency trading (HFT) involves fully automated trading using rapid movements in and out of stocks — often for less than a second.
By gaining even a millisecond’s timing advantage, HFT guarantees enormous revenue and forces large investors to develop complicated and expensive defensive strategies to conceal their orders from parasitic traders, Schneiderman said.
Although the AG did not mention its name, he questioned the earnings of one of the largest high-frequency traders, Virtu Financial, which filed to go public March 10.
“Some high-frequency traders appear to trade with virtually no risk,” said Schneiderman. “Last week, a large high-frequency trading shop disclosed that it made money on every trading day over the course of four years,” he said, in an oblique reference to Virtu, which disclosed the earnings in a regulatory filing. “Out of 1,238 trading days, they made a profit on 1,237 of those days.”
Virtu was founded by former New York Mercantile Exchange Chairman Vincent Viola in 2002. He declined to comment.