High-speed trading probed by U.S. Justice Department
Multiple U.S. authorities investigate trading practices amid allegations markets are 'rigged'
The U.S. Justice department is investigating high-frequency trading, Attorney General Eric Holder confirmed today, saying the U.S. will look into whether the practice violates insider-trading laws.
“In the financial sector, concerns have been raised recently about a practice called high-frequency trading," Holder said during opening remarks at an appropriations committee hearing.
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“This practice, which consists of financial brokers and trading firms using advanced computer algorithms and ultra-high speed data networks to execute trades, has rightly received scrutiny from regulators. I can confirm that we at the Justice department are investigating this practice to determine whether it violates insider-trading laws,” he added.
There has been widespread concern about high-frequency trading among investors, with the FBI confirming earlier this week that it has begun a probe of trading practices.
New York Attorney General Eric Schneiderman has campaigned against high-frequency stock trading, saying it gives firms an unfair advantage and erodes public confidence in the stock market. The Commodity Futures Trading Commission and the Securities and Exchange Commission are also looking into the practice.
High-frequency or high-speed trading involves the use of powerful computers that analyze market information and then execute buy and sell orders for stocks within a fraction of a second.
Financial journalist and author Michael Lewis has alleged that U.S. markets are “rigged” because of the advantages high-speed traders have over other investors.
In his book, Flash Boys: A Wall Street Revolt, he describes how high-frequency traders can use their speed advantage to buy the shares other traders have placed orders for and then sell them to those investors at a slightly higher price — all in milliseconds.
He based his book on an investigation by Canadian Brad Katsuyama, who probed high-speed trading practices during his time as a trader with RBC in New York.
One way that high-frequency traders have gained an edge is by receiving market-moving information, such as corporate earnings releases, before other traders and investors. They then exploit that advantage by placing buy or sell orders before other investors.
Until recently, the firms have been able to access crucial financial information by subscribing directly to companies that publish corporate reports, rather than accessing it through financial news wires such as ThomsonReuters, Dow Jones and Bloomberg.
In February Business Wire, a company that distributes corporate earnings and other news releases, said it would stop providing its service directly to high-frequency trading firms and Marketwired followed suit in march.
With files from Reuters, Associated Press