Wall Street Questions the Legality of High-Speed Trading
The last week saw high-speed trading transformed from something of interest just to Wall Street traders to the subject of public outrage. The change was caused by Michal Lewis’ new book “Flash Boys” and helped by New York state Attorney General Eric Schneiderman announcing that there will be an investigation into the business which he labelled “Insider Trading 2.0”. Furthermore, last Friday the US Attorney General Eric Holder announced an FBI probe into the practice.
High-speed trading is when traders use the latest technology to enter in and out of shares at lightning speed and also make use of technology to see the market a few milliseconds before others.
This has raised concerns that traders are using this edge to continually front-run other investors and force them to pay higher prices. One high-speed trading firm, Virtu Financial, revealed that in the last five years it has only lost money trading on one day, a fact that suggests that high-speed traders enjoy considerable advantages.
Of course the question is whether the practice is illegal or not. Virtu has said that it would delay its planned IPO while Goldman Sachs has said it would leave the New York Stock Exchange trading floor and lend support to rules to prevent high-speed trading. However, it is by no means clear if that the practice is illegal.