(New York, NY) Attorney General Eric T. Schneiderman published an op-ed in the New York Daily News on his investigation into unfair advantages commonly provided to a small group of elite, high-frequency traders, including a specific practice known as latency arbitrage, in which market-moving data is given to some firms milliseconds before it is available to all investors. In his op-ed, the Attorney General explained the danger these practices pose to the integrity of our financial system, and he called on the industry to partner with regulators, like his office, to level the playing field.
The following are excerpts from the op-ed:
- ON THE DEBATE OVER HIGH-FREQUENCY TRADING: Now that high-frequency trading is finally getting the attention it deserves, the response has quickly devolved into a spin war that benefits neither the industry nor investors … Amid all the hyperbole, one thing is clear: Some investors are using questionable practices to gain an unfair advantage over others. This must change. We need to get past the talking points and make clear the type of practices that are indefensible.
- WHAT LATENCY ARBITRAGE IS: Put simply, latency arbitrage describes the trading strategy whereby high-frequency traders gain access to market prices before regular investors. Armed with what amounts to knowledge of the future, these traders execute tens of thousands of trades in milliseconds with essentially zero risk — driving up the cost for other purchasers of stock.
- HOW IT WORKS: When traditional investors buy or sell stocks, they often use what’s called the “consolidated feed” to gather market data and determine the best bid or offer in the nation. This is particularly so in private trading venues, where regular investors like pension funds often trade. Because high-frequency trading firms receive market prices before traders relying on the consolidated feed, they are able to see the prices early, jump in and take the best one in the blink of an eye. Regular investors are left in the dark.
- ON THE PRICE OF AN UNFAIR ADVANTAGE: Our markets work best when everyone plays by the same set of rules, when information is provided to the market at the same time, and when capital is actually put at risk. Latency arbitrage runs counter to those principles … High-frequency traders can’t do this alone. Firms can engage in latency arbitrage because exchanges sell them special services that allow them to get a sneak peak at market prices.
- ON THE COST TO EVERYONE ELSE: With direct access to an exchange’s data and the ability to plug their computers directly into the computers running public and private exchanges, this elite group of traders is given the ability to reliably take money out of the system. That money is being taken from someone. It happens at the expense of everyone else in the market — from individual traders to institutional investors like pension funds. That is why I am examining the special access that gives a select group of firms the milliseconds advantage they use to exploit regular investors through latency arbitrage.
- ON CURBING THE ARMS RACE: I am also calling for market reforms like the one put forward by experts at the University of Chicago … Our current system amounts to an arms race, in which winners and losers are picked based on who has the fastest computers and the earliest access to information. Under the experts’ proposal, orders would be processed in batches after short intervals — potentially less than a second. This would ensure that price is the deciding factor in who obtains a trade, not speed alone.
The full op-ed by Attorney General Schneiderman can be read here.
