Federal agents are making an unusual public plea for the financial industry to bare its secrets.
The Federal Bureau of Investigation has openly solicited traders and stock-exchange workers to blow the whistle on possible front-running and manipulation via high-speed computers.
The FBI joins a roster of authorities examining high-frequency trading, in which firms typically use super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies. The strategy to invite whistleblowers was prompted in part by the complexity of proving any misconduct, according to a person with direct knowledge of the matter.
Securities and Exchange Commission Chair Mary Jo White told lawmakers today that the agency is conducting “a number” of enforcement investigations of high-frequency and automated trading.
“We are pretty much focused on any abuses in that space,” White told a House Appropriations subcommittee.
Whistleblowers are ready to step forward from stock exchanges, Michael Lewis, author of “Flash Boys,” said in an interview on NBC’s Today Show. The FBI is encouraging anyone with knowledge of possible misconduct to contact them, according to an FBI spokesman.
The FBI’s inquiry stems from a multiyear crackdown on insider trading, which has led to at least 79 convictions of hedge-fund traders and others. Agents are examining, for example, whether traders abuse information to act ahead of orders by institutional investors, according to the FBI. Even trades based on computer algorithms could amount to wire fraud, securities fraud or insider trading.
New York Attorney General Eric Schneiderman opened a broad investigation into whether U.S. stock exchanges and alternative venues give such traders improper advantages. The SEC is taking a “data-driven” approach to consideration of new rules and is “on top of” worries about the fairness of high-frequency trading, White said.
Regulators have focused for years on whether high-speed trading hurts market stability. More recent law enforcement investigations are shifting the focus to unfair practices and possible criminal activity.
Critics including some investors and regulators have said such trading, which captured the spotlight in the May 2010 flash crash that shook U.S. equities, serves little purpose, may distort the market and may leave individual shareholders at a disadvantage.
Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than what’s typically available to the public. Wall Street banks and rapid-fire trading firms pay thousands of dollars a month for these services from firms including Nasdaq OMX Group Inc. and IntercontinentalExchange Group Inc.’s New York Stock Exchange.
Robert Madden, a spokesman for Nasdaq, and Eric Ryan at the NYSE, declined to comment on the FBI’s inquiry. Jim Margolin, a spokesman for Manhattan U.S. Attorney Preet Bharara, declined to comment when asked if the office was looking at high-frequency trading.
The FBI began focusing on high-frequency traders last year, according to the person with knowledge of the matter. Schneiderman disclosed his inquiry earlier this month. Market regulators have asked for years whether new restrictions on rapid-fire trading were needed.
Daniel Hawke, the head of the SEC’s market-abuse unit, said in 2012 that the agency was examining practices such as co-location and rebates that exchanges pay to spur transactions. Last year, the Commodity Futures Trading Commission announced a review of speed trading and sought industry input.
Federal prosecutors have scored dozens of insider trading convictions in recent years, including several linked to SAC Capital Advisors LP, the hedge-fund firm run by Steven A. Cohen that is changing its name to Point72.
SAC agreed in November to pay a record $1.8 billion and plead guilty to securities fraud to settle allegations of insider trading. As part of the settlement, Cohen agreed to close SAC’s investment advisory business.