HFT firms Said to Be Subpoenaed in NY Probe

New York’s attorney-general has sent subpoenas to six high-frequency trading firms as its investigation into whether certain traders have an unfair advantage over others widens beyond the stock exchanges.

The office of Eric Schneiderman last week sent subpoenas to six trading firms, including Tower Research, Chopper Trading and Jump Trading, a person familiar with the matter said. The identity of the other three firms could not immediately be identified. A seventh high-frequency trading firm received a letter, this person said.

Last month Schneiderman declared war on HFT firms, saying that some of their practices were “fundamentally unfair — and potentially illegal — situations that give elite groups of traders early access to market-moving information at the expense of the rest of the market.”

What the attorney general could be looking for is “trade through violations,” which allows high-frequency trading firms to know the best price of a security before it’s even processed by the exchange.

There is a regulation that requires stock exchanges to execute all trades at the National Best Bid and Offer, or NBBO. The NBBO is the national price for any stock. Exchanges do this by aggregating bids and offers all over the market and finding the most precise price based on that demand.

HFT critics believe some exchanges may be allowing HFT firms to get a jump on the aggregation process, technically allowing them to trade the NBBO before it’s the NBBO. You follow?

What regulators don’t want is for there to be two prices in the market, one for HFTs and one for everyone else.

We’ll let you know more when Schneiderman makes his announcement. Knowing him, he will make it loud.

Agencies/Canadajournal