With Michael Lewis’ exposé on high-frequency trading Flash Boys burning up the charts and occupying seemingly every hour of financial television, law enforcement officials and regulators are eager to let the public know they are investigating the practice.
Although the FBI said on Monday — the day after Michael Lewis’ appearance on 60 Minutes — that it was investigating high-speed trading for possible violations of insider trading laws by potentially trading on non-public information, the country’s chief law enforcement officer confirmed to the public that there was investigation during a hearing in front of the House Appropriations Committee.
“In the financial sector, concerns have been raised recently about a practice called ‘high-frequency trading.’ 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,” Attorney General Eric Holder said in prepared remarks. “I can confirm that we at the Justice Department are investigating this practice to determine whether it violates insider trading laws.”
Holder was testifying as part of two days of hearings with the House and Senate appropriations committees, meaning he was not particularly compelled to mention the trading investigation. The FBI has been looking into high-frequency trading for at least a year, according to the Financial Times, which initially reported on an investigation in March of last year.
New York state Attorney General Eric Schneiderman also has a long-running investigation into high-speed trading and said earlier this week that some trading practices “may be illegal.”
Schneiderman further injected himself in the raucous debate over high-frequency trading by prompting the president of one of the largest electronic exchanges, William O’Brien of BATS Global Markets, to correct a misstatement he made on CNBC about which data feed BATS uses to price trades.
Luis Aguilar, a member of the Securities and Exchange Commission, criticized a practice that helps underlie the profit model of many high-frequency trading firms, the “maker-taker” model where traders who want their orders to be executed immediately pay fees to the exchange and participants who have standing orders are paid rebates.
Aguilar pointed to critics who say maker-taker has “incentivized some market participants, including high-frequency traders, to trade primarily, if not solely, to profit from collecting maker-taker rebates,” and called for a pilot program “in which maker-taker rebates would be temporarily prohibited for certain securities.”
“The department is committed to ensuring the integrity of our financial markets,” Holder said today, “and we are determined to follow this investigation wherever the facts and the law may lead.”