By Karen Freifeld
NEW YORK, March 18 New York state's attorney
general on Tuesday said U.S. stock exchanges and alternative
trading platforms provide high-frequency traders with unfair
technological advantages that give them early access to key
The stock exchanges allow traders to locate their computer
servers within trading venues, armed with extra network
bandwidth and high-speed switches that give them pricing, volume
and order information ahead of others, said New York Attorney
General Eric Schneiderman.
"Rather than curbing the worst threats posed by
high-frequency traders, our markets, as structured today, are
increasingly too focused on catering to them," he said on
Tuesday in a speech at New York Law School.
Schneiderman has begun meetings with the exchanges and
alternative trading venues to discuss reforms, according to a
person familiar with the situation.
A spokeswoman for the New York Stock Exchange declined to
comment. Spokesmen for Nasdaq OMX Group and BATS Global
Markets also declined to comment.
Representatives of Credit Suisse Group's Crossfinder
and Goldman Sachs Group's Sigma X, two of the
biggest alternative trading platforms, or "dark pools," also
declined to comment.
But according to Manoj Narang, chief executive of Tradeworx
in Red Bank, New Jersey, which operates a high-frequency trading
business, Schneiderman's perspective on the high-speed
technology is backward.
"The arms race is dead," Narang told Reuters. "This
much-hyped advantage technologically savvy players may have is
just not there."
Speed has become less important since the gap between fast
and slow players has narrowed to milliseconds, he said.
Among the practices Schneiderman called into question in his
speech were "co-location," a practice which allows firms who pay
a fee - typically thousands of dollars a month - to locate their
computer servers within the exchanges' data centers.
Co-location reduces by milliseconds the time it takes to
transmit, long enough for so-called predatory high-speed traders
to benefit and for the markets to suffer, he said.
For instance, the traders look for arbitrage opportunities
between and among trading venues to capture momentary
differences in stock prices.
The firms also artificially inflate prices by detecting a
big trade from an institutional investor and positioning
themselves on the other side, Schneiderman said.
Institutional investors have been forced to develop
strategies to hide their orders from these traders, he said,
such as by routing the orders into "dark pools," which are less
Schneiderman has suggested reforms, such as a proposal by
University of Chicago economists that stock exchanges process
orders in batches rather than continuously. Such a change would
help ensure that price trumps technology in deciding who obtains
a trade, he said.
Narang said the proposed "batch auctions" could be
"extremely dysfunctional" to how the market functions. He also
said co-location, which is regulated, has been unfairly maligned
and represents equal access.
Schneiderman also called for tougher regulation.
"We are working on these and a wide range of issues as part
of our ongoing review of our current equity market structure,"
said John Nester, a spokesman for the U.S. Securities and
Exchange Commission, which regulates U.S. stock exchanges and
alternative trading sites.
James Angel, a professor at Georgetown University who
specializes in the regulation of financial markets, said that
many high-frequency traders do things that benefit low-frequency
investors like himself, such as making sure the exchange trade
fund he buys is priced the same as the basket of stocks that go
"Not everyone with a fast computer is a bad guy," Angel
said. "Rather than restrict all fast computers, we need
regulators who can tell the good from the bad and keep the bad
Nasdaq OMX shares fell as much as 4 percent during the
trading day on Tuesday, their biggest single-day drop since
April 2013. The shares ended down $1.23, or 3.1 percent, at
Evercore analyst Chris Allen suggested Schneiderman's
comments were weighing on the shares. "Anytime you have an
attorney general investigating something, people get worried
about what the outcomes are going to be," he said.
Other observers suggested Nasdaq shares were down on news
that the New York Stock Exchange was in the lead in getting the
listing for Alibaba, the dominant force in China's $1.6 trillion
Schneiderman's investigation is the latest focus in a probe
of Wall Street practices that gives elite groups of traders
access to information at the expense of other participants. He
also has scrutinized the early release of analyst and consumer
sentiment data as well as market-moving press releases.
As part of the probe, Thomson Reuters Corp
agreed to suspend its early release of the widely watched
Thomson Reuters/University of Michigan consumer sentiment data
to a small group of clients.