Government regulators probe high-frequency Wall Street trading

Amid growing concern that high-frequency, automated Wall Street trading practices may be creating new levels of unfairness in the financial markets, a leading regulatory agency said Thursday it is investigating whether the practice may be violating rules and hurting ordinary investors.

"Staff [are] responding to concerns brought to us about certain practices," U.S. Commodity Futures Trading Commission (CFTC) Acting Chairman Mark Wetjen told reporters, responding to questions about high-frequency trading. "And then whether or not it meets the definition of manipulative activity under our statute."

Brokerage firms use high-frequency trading to get a jump on their competitors. Powerful computers analyze market information and then execute buy and sell orders for stocks within a fraction of a second. Proponents say this makes it easier for buyers and sellers to meet each other in the market, but critics argue it can cause sudden market crashes and mask market manipulation or other illegal activity.

The long-running debate about high-frequency trading intensified Monday after best-selling author Michael Lewis published "Flash Boys: A Wall Street Revolt." The book contends that the practice of high-speed trading has effectively rigged the stock market, allowing some to profit from trades made at speeds unavailable to most investors.

 “The more we dive into this, maybe we'll come to that conclusion, but I'm certainly not in a position to say that right now," Wetjen said during a meeting with reporters who had raised questions about the book. He said it was currently not clear whether high-frequency trading skews the market against ordinary investors.

One way that high-frequency traders have allegedly gained an edge is by being able to process market-moving information, such as corporate earnings releases, before other traders and investors. They can then be first to place buy or sell orders.

The practice has come under increasing scrutiny in recent months. New York Attorney General Eric Schneiderman says it gives the firms involved an unfair advantage and erodes public confidence in the stock market.

Business Wire, a company that distributes corporate earnings and other news releases, said in February that it would stop providing its service directly to high-frequency trading firms. Even though the direct distribution of its electronic feeds to a handful of trading firms was not illegal, the company said it was concerned about its reputation.

On Tuesday, the FBI said it has been looking into the practices of high-frequency stock trading firms.

The FBI has been investigating the practice for about a year, according to a person familiar with the matter, who spoke on condition of anonymity. The Wall Street Journal reported Tuesday that investigators were examining the practice of placing a group of trades and then canceling them to create the false appearance of market activity.

The U.S. Securities and Exchange Commission has several active investigations into possible wrongdoing by high-frequency stock traders and other equity market structure issues, SEC Chair Mary Jo White said Tuesday.

"We currently have ... a number of ongoing investigations regarding various market integrity and structure issues, including high-frequency traders and automated trading," White told a U.S. House of Representatives appropriations panel.

"We are very much focused on any abuses in that space," White said. "Our approach at the SEC ... is to be data-driven and disciplined to determine where high-frequency traders fit into the range of market quality issues."

Along with Wall Street regulators, some large firms are also turning their attentions to high-frequency trading.

In a statement released Thursday, major brokerage and banking firm Charles Schwab said the practice is “a growing cancer and needs to be addressed.”

“The integrity of the markets is at the heart of our economy. High-frequency trading undermines that integrity and causes the market to lose credibility and investors to lose trust. This hurts our economy and country. It is time to treat the cancer aggressively,” the statement read.

Al Jazeera and wire services