Friday, March 21, 2014
Insider trading 2.0? New York State Attorney General talks about high frequency trading and market design
New York State Attorney General Eric Schneiderman has been talking market design, in a lawman sort of way. Interestingly, he's interested in the proposal by Budish, Cramton and Shim for frequent batch auctions. (See previous posts here and here.)
Press release: A.G. Schneiderman Calls For New Efforts To Eliminate Unfair Advantages Provided By Trading Venues To High-Frequency Traders
Schneiderman: "We Will Continue to Shine a Light on Unseemly Practices That Cater to High-Frequency Traders at the Expense of Other Investors, and Other Forms of Insider Trading 2.0"
Text of speech: Remarks on High-Frequency Trading & Insider Trading 2.0
"As your Attorney General, I am the top law enforcement officer for the State of
New York, which gives me a unique role to play in the oversight of Wall Street.
And I take that very, very seriously. I spent most of my career in private practice
before becoming Attorney General, which is really a distinction among
Attorneys General in New York State. And I represented big financial firms; I
represented stock and commodities markets.
"And I am a believer in our market system, and I am a believer that our market
can only function with strong, clear regulations, and uniform and equitable
enforcement of those regulations.
"We have to ensure that our markets work for the entire investing public, not
just for a small number. And the Martin Act, which I hope you’ve heard of,
empowers my office, and our Investor Protection Bureau in particular, to investigate pretty much any fraudulent or deceptive practice in financial
"One of the fundamental principles that drives every part of our office is a very
simple, very American notion of equal justice under law. There has to be one
set of rules for everyone.
"But, as I mentioned, our capital markets can only succeed if investors view them
as fair and as fairly regulated.
"So that’s why we’ve been focusing on cracking down on fundamentally unfair –
and potentially illegal – situations that fall outside the parameters of traditional
insider trading but give elite groups of traders access to market-moving
information at the expense of the rest of the market.
"This is what we call Insider Trading 2.0, and it’s one of the greatest threats to
public confidence in the markets.
"Currently, on our exchanges, securities are traded continuously, which means
that orders are constantly accepted and matched with ties broken based on
which orders arrived first. This system rewards high-frequency traders who
continuously flood the market with orders – emphasizing speed over price.
"The University of Chicago proposal – which I endorse – would, in effect, put a speed bump in place. Orders would be processed in batches after short
intervals – potentially a second or less than a second in length – but that would ensure that the price would be the deciding factor in who obtains a trade, not who has the fastest supercomputer and early access to market-moving information.
"This structural reform – sometimes called “frequent batch auctions” -- would help catch and cap the supercomputer arms race now underway. This is
tremendously important, because even advocates of high-frequency trading
have always recognized that the potential for destabilization of the markets
from volatility is a problem.
"If you had frequent batch auctions, there’s no point in trying to get faster than
whatever the interval is. It would discourage the risk taking that can cause flash
crashes because, in the quest for greater and greater speed, there is, in and of
itself, a threat to market stability. It rewards those who are taking chances. It
rewards those who try risky new ways to gain a few milliseconds of speed. And that’s something we could put an end to if this proposal were successfully
carried out. "
Bloomberg article:High-Speed Trading Faces New York Probe Into Fairness
"Attorney General Eric Schneiderman said today that he’s 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."
CNBC interview (video): http://video.cnbc.com/gallery/?video=3000258750
..."frequent batch auctions, something that came out of the University of Chicago, not some enemy of free markets..."