U.S. Attorney General Eric Holder promised Congress a thorough investigation into whether high-frequency trading violates laws against insider trading.
Holder said he is responding to concerns being raised about whether the practice creates an uneven playing field for investors.
“The department is committed to ensuring the integrity of our financial markets, and we are determined to follow this investigation wherever the facts and the law may lead,” Holder said in testimony today at a hearing of the House Appropriations subcommittee that oversees the Justice Department.
The Federal Bureau of Investigation has said that its agents are probing whether firms that conduct high-frequency trading get an unfair jump on the competition by using computers and data lines to gain access to non-public information. The bureau has taken the unusual step of publicly appealing for traders and stock-exchange workers to blow the whistle on possible manipulation tied to the super-fast computer networks.
Separately, Democrats in Congress are renewing a push to levy fees on high-frequency trading in an effort to generate hundreds of billions of dollars in revenue, or tax the practice out of existence. The measure isn’t likely to move forward in the House, where no member of the Republican majority has signed on as a co-sponsor.
The practice drew extensive media coverage this week with the publication of “Flash Boys,” a book on the topic by best-selling author Michael Lewis that charges high-frequency trading has rigged the market against investors.
The FBI’s inquiry stems from a multiyear crackdown on insider trading that has led to 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.
“I can confirm that we at the United States Justice Department are investigating this practice to determine whether it violates insider trading laws,” Holder told lawmakers in outlining the department’s priorities.
Other federal and state agencies also are examining high-frequency trading, which relies on computers and high-speed data connections to post and cancel orders in fractions of a second to profit on slight price discrepancies.
New York Attorney General Eric Schneiderman opened a broad investigation into whether U.S. stock exchanges and alternative venues give such traders improper advantages.
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.
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.