The technological arms race among professional equity traders threatens to destabilise US markets and more should be done to limit their speed, according to New York attorney general Eric Schneiderman.
Mr Schneiderman, whose office is examining privileges marketed to high-frequency firms such as enhanced data feeds, said Michael Lewis's book Flash Boys will help focus attention on the debate. The new book says speed traders are rigging the US market to make tens of billions of dollars.
Mr Schneiderman’s inquiry threatens to disrupt a model that market regulators have permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centres as the exchanges, a practice known as co-location that lets them shave millionths of a second off transactions.
"We celebrate technology but we have speed limits and airbags," said the attorney general, adding that the US Securities and Exchange Commission is taking a "hard look" at high- frequency trading (HFT).
Mr Lewis is adding his voice to a debate that has obsessed the securities industry for almost a decade while only periodically surfacing in public via events such as the May 2010 flash crash, in which the Dow Jones industrial average posted an almost 1,000-point loss.
“The United States stock market, the most iconic market in global capitalism, is rigged . . . It’s crazy that it’s legal for some people to get advance news on prices and what investors are doing,” said Mr Lewis.
Everyone who owns equities is victimised by the practices, in which the fastest traders figure out which stocks investors plan to buy, purchase them first and then sell them back at a higher price, he said.
High-frequency trading comprises a diverse set of software- driven strategies that have spread from US equity markets to most developed countries as computer power grew and regulators tried to break the grip of centralised exchanges. They usually employ super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies on more than 50 public and private venues that make up the US equities market.
Firms using the tactics account for about half of share volume in the US, a statistic that hints at the obstacles faced by proposals to rein them in.
Exchanges rely on HFT for profits as well as liquidity, with electronic market makers all but eliminating the old system of human floor traders. While critics such as Mr Lewis see a Wall Street plot, proponents say the new system is faster and cheaper.
Eric Ryan, a spokesman for the New York Stock Exchange, and Nasdaq OMX's Rob Madden declined to comment on Mr Lewis. "We completely disagree with allegations that the US equity market is rigged," Bill O'Brien, president of BATS Global Markets said.
"While we should never stop trying to improve our market structure, it is unfair and irresponsible to accuse people simply because they use technology and enhance competition."