U.S. Attorney General Eric Holder recently called high-frequency trading “Insider Trading 2.0.” Alternatively, the director of the Securities and Exchange Commission, Mary Jo Wright, feels differently about the new stock trading practice. She has explicitly said that it is not unlawful insider trading. The contrasting ideas of two powerful Federal regulators is somewhat surprising. The differences in opinions between regulators, such as the SEC, the Department of Justice, as well as the New York Attorney General, make it only more complicated to figure out what business practices on Wall Street are legal. This ambiguity in business law can affect businesses across the U.S., including those in Miami.
In March 2014, author Michael Lewis published the book Flash Boys. This book exposed the stock trading technique known as high-frequency trading. In high-frequency trading, traders working for major trading firms utilized powerful computers to track trades between investors. Using that information, the traders would establish algorithms that would set trades on behalf of the investment firm to be traded in a fraction of a second before the original trade from the investor. The investment bank traders would be able to trade stocks at slightly more favorable prices which would gain small profits for the bank in each trade. Over thousands or millions of trades, the investment bank would be able to generate millions of dollars.
The issue with this type of trading is that only a small group of banks, and definitely not individual investors, can conduct these types of extremely fast and sophisticated trades. According to Lewis’ book, this type of trading makes the American financial market less free and open and more closely controlled by big Wall Street banks.
Is This Actually New?
Some members of Wall Street do not see what the big deal is about high-speed trading. These traders note that insiders have always had advantages in having better information than most other investors because they are so heavily dedicated to obtaining information quickly and accurately that they often receive information about the markets that is more accurate than information available elsewhere, and they received it far in advance of other traders.
The sheer speed of high-speed trading though, which is done in milliseconds, is disconcerting to some. The fact that the information is disseminated faster than anyone can actually see with the naked eye bothers some, making them feel that it may be inherently unfair and even illegal.
Slowing Down the Flash Boys?
Some have suggested that the SEC create a sort of net neutrality style rule on stock trading. This would mean that all trades would be subject to a speed limit that would limit any advantages that some traders may have over others. The SEC has rejected such limits. The SEC fears that such a limit would be backward and only make markets less efficient.