The US Justice Department is investigating whether traders using ultra-fast computer algorithms are violating insider-trading laws, Attorney General Eric Holder Jr. has confirmed.
High-frequency traders, which dominate stock trading, have raked in billions of dollars over the past few years by using sophisticated technology to execute transactions at blink-of-an-eye speeds. But regulators have been questioning whether the value outweighs the potential problems - from technological glitches that can trigger huge market disruptions to issues of marketplace fairness.
The concerns have morphed into investigations by federal and state agencies, including the Securities and Exchange Commission, which is working on a parallel investigation, Holder told a House Appropriations subcommittee.
"I can confirm that we at the United States Department of Justice are investigating this practice to determine whether it violates insider-trading laws," Holder said. "The department is committed to ensuring the integrity of our financial markets, and we are determined to follow this investigation wherever the facts and the law may lead."
For years, regulators have struggled to keep up with the technological prowess of the traders they oversee and have grappled with whether they should rein in high-frequency trading, which accounts for at least half of all trading activity on U.S. exchanges.
Supporters of the technology say that it is a lubricant for the stock market's engine, providing liquidity and helping cut transaction costs for long-term investors.
But critics have been quick to blame these traders for market disruptions and accuse them of gaming the system without regard for market fundamentals.
A book released this week, Flash Boys: A Wall Street Revolt, has reignited the debate. Author Michael Lewis said during a Sunday interview on "60 Minutes" that U.S. markets are "rigged" in favour of high-speed traders, whose technology allows them to gain split-second trading advantages over other investors.
Read more: Why is Wall St so surprised about high-frequency trading?
By thrusting the issue back into the spotlight, the book puts added pressure on regulators to act. In Friday's testimony, Holder said he's getting "up to speed" on the technology. The department is looking into whether "people are getting an inappropriate advantage" because of the speed at which information gets routed, he said. "As I understand it, I'm just learning this, even milliseconds can matter," Holder added.
SEC Chairman Mary Jo White told a House panel this week that her agency has a "number of ongoing investigations" into high-frequency trading and market-integrity issues. The agency declined to elaborate on White's remarks or comment on whether it is looking into specific firms.
The Commodity Futures Trading Commission is also probing high-frequency trading techniques, according to people familiar with the matter. In September, when unveiling a "concept release" on market technologies, the CFTC signaled that it might more strictly regulate high-frequency traders. It solicited comments from the public on whether such traders should register with regulators and whether the risk controls for high-frequency trading should be different from the ones imposed on other types of automated trading.
New York Attorney General Eric Schneiderman has taken an especially aggressive stance. Last month, Schneiderman said he was investigating the special services that U.S. stock exchanges and alternative trading venues sell to high-frequency traders, alleging that the services give an elite group of traders early access to market-moving data.
The probe builds on similar investigations by Schneiderman, including one that involved a closely watched consumer confidence survey compiled by the University of Michigan and distributed exclusively by Thomson Reuters. For years, Reuters charged a premium - an extra $6,000 - to clients who wanted the privately generated survey results two seconds before other clients. In July, Thomson Reuters agreed to suspend its early data release.
- The Washington Post