High-frequency trading firm Virtu Financial is in New York Attorney General Eric Schneiderman’s sights.
New York’s top lawman — who first alluded to Virtu when he announced his probe of the controversial trading in early March — sent the firm a letter seeking information about its practices, a source familiar with the matter told The Post.
In the uproar that intensified following the March 31 publication of Michael Lewis’ “Flash Boys,” Virtu had already pulled its initial public offering. Now it has to respond to Schneiderman.
“The letter seeks information about special arrangements the companies have with dark pools and exchanges, their trading strategies and whether they practice latency arbitrage,” said the source.
So-called latency arbitrage was mentioned in Lewis’ blockbuster as a method of legal front-running practiced by high-frequency traders.
High-frequency trading 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, high-frequency trading guarantees enormous revenue and forces large investors to develop complicated and expensive defensive strategies to conceal their orders from parasitic traders, Schneiderman said in a public speech last month.
Although Schneiderman did not mention Virtu by name, he questioned its lofty earnings, which were revealed in its offering prospectus.
“Some high-frequency traders appear to trade with virtually no risk,” he said.
“Last week, a large high-frequency trading shop disclosed that it made money on every trading day over the course of four years,” Schneiderman said, an oblique reference to Virtu, which disclosed the earnings in its 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. It is one of the largest high-frequency traders.
He could not be reached for comment.
In the debate surrounding Lewis’ book, protagonist Brad Katsuyama called Virtu one of the “good high-frequency traders.”
Katsuyama last year launched a new exchange, called IEX, to thwart the high-frequency traders by slowing down trades so they could not jump ahead of investors.
Virtu is one of the few that began to use IEX.
Other firms that have received similar letters from Schneiderman include Jump Trading, Chopper Trading and Tower Research Capital, according to Bloomberg, which first reported the Virtu letter.
Separately, Providence, Rhode Island, has sued Bank of America, the New York Stock Exchange and dozens of other exchanges, brokers and traders, over the practice, Bloomberg reported.