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 The stock exchanges allow traders to locate their computer servers
within trading venues, armed with extra network bandwidth and
high-speed switches that give them access to pricing, volume and
order information ahead of others, New York Attorney General Eric
Schneiderman said.
"Rather than curbing the worst threats posed by high-frequency
traders, our markets, as structured today, are increasingly too
focused on catering to them," he said in prepared remarks at a
symposium hosted by New York Law School.
Schneiderman has begun meetings with the exchanges and alternative
trading venues to discuss reforms, according to a person familiar
with the situation.
A spokeswoman for the New York Stock Exchange declined comment. A
Nasdaq spokesman did not immediately return a call for comment.
Among the practices Schneiderman called into question were
"co-location," which allows firms who pay a fee — typically
thousands of dollars a month — to locate their computer servers
within the exchanges' data centers.
Co-location reduces by milliseconds the time it takes to transmit,
long enough for "predatory" high-speed traders to benefit and for
the markets to suffer.
For instance, he said, the traders look for arbitrage opportunities
between and among venues to capture momentary differences in stock
prices.
The firms also artificially inflate prices, he said, by detecting a
big trade from an institutional investor and positioning themselves
on the other side.
Institutional investors have been forced to develop strategies to
hide their orders from these traders, such as by routing the orders
into alternative venues known as "dark pools," which are less
regulated, Schneiderman said.
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He suggested reforms for stock exchanges, such as a proposal by
University of Chicago economists that they process orders in batches
rather than continuously, to ensure that price trumps technology in
deciding who obtains a trade.
Schneiderman has been conducting a sweeping investigation of early
access to data. Last month, Berkshire Hathaway's Business Wire said
it would no longer sell potentially market-moving press releases
directly to high frequency-trading companies after months of
discussion with his office.
In January, BlackRock Inc, the world's largest asset manager, agreed
to end its analyst survey program worldwide, and 18 brokerages,
including Goldman Sachs, JPMorgan Chase and Citigroup, later agreed
to end their participation in such programs.
Last July, Thomson Reuters Corp said it would suspend its early
release of the widely watched Thomson Reuters/University of Michigan
consumer sentiment data to a small group of clients in response to
the probe.
(Editing by Bernadette Baum)
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