In a speech at an Insider Trading symposium hosted by the New York Law School, Attorney General Eric. T. Schneiderman (“A.G. Schneiderman”) called for tougher regulations and market reforms to address the “unfair advantages commonly provided to high-frequency trading firms at the expense of other investors.”
In his remarks, A.G. Schneiderman detailed a number of services that trading venues offer to high-frequency traders (“HFTs”), including, but not limited to:
- allowing traders to locate their computer servers within the trading venues themselves;
- providing extra network bandwidth to HFTs; and
- attaching ultra-fast connection cables and special high-speed switches to their servers.
According to A.G. Schneiderman, each of these services offers clients a timing advantage – often in milliseconds – that allows HFTs to make rapid and often risk-free trades before the rest of the market can react.
A.G. Schneiderman stated that he is “committed to cracking down on fundamentally unfair – and potentially illegal – arrangements that give elite groups of traders early access to market-moving information at the expense of the rest of the market.” Labeling it “Insider Trading 2.0,” A.G. Schneiderman stated that special services for HFTs are “one of the greatest threats to public confidence in the markets.” A.G. Schneiderman further noted that these special services have forced large institutional investors to develop complicated and expensive defensive strategies in order to “conceal their legitimate orders from parasitic traders,” including the routing of orders into alternative trading venues, such as dark pools.
To address these issues, A.G. Schneiderman called on exchanges and other regulators to review market structure reforms. One proposal that he highlighted would seek to process orders in batches in frequent intervals rather than continuously. This, he suggested, would ensure that price, and not speed, is the deciding factor in who obtains a trade.
According to A.G. Schneiderman’s press release, his speech is part of a broader initiative. In February, he announced interim agreements with a number of financial firms to stop their practice of cooperating with analyst surveys administered by certain elite and technologically sophisticated clients.
Lofchie Comment: Issues concerning how the National Market System should operate would seem to be within the purview of the federal government generally and the SEC in particular rather than New York State. In this regard, certain of A.G. Schneiderman’s suggestions – e.g., as to the batch execution of orders – seem entirely impractical, given that there are over a dozen national securities exchanges. This raises the question of how governmental resources should be allocated in an environment where there are limited tax dollars available, a point raised often with respect to rulemaking initiatives by the CFTC as well. In short, is the best use of New York’s resources the redesign of the National Market System (on which Congress is already holding hearings and which is a matter of federal law) or to pursue violations of New York law?