Schneiderman Announces Inquiry Into Services for High-Speed Traders

The New York attorney general, Eric T. Schneiderman, has already announced his intention to police the high-frequency traders that dominate financial markets. Now, he is expanding the scope of that crackdown.

Mr. Schneiderman announced a new inquiry on Tuesday into services that allow fast traders to profit on important information before other investors even see it. He urged regulators and stock exchanges to curb some of these practices, which help foster what he terms “insider trading 2.0.”

The attorney general has zeroed in on the exchanges, including the New York Stock Exchange and Nasdaq, which allow high-frequency traders to pay for the ability to put their computer servers within the exchanges’ data centers. The practice, known as co-location, shaves milliseconds off the time it takes them to receive market information.

A number of other services provided by exchanges to high-frequency traders, including extra network bandwidth, special switches and fast connection cables, are also coming under scrutiny by Mr. Schneiderman, who said the services give the traders a “leg up on the rest of the market.”

“I am calling on other regulators and on our exchanges to take real, concrete steps to end some of the worst abuses of predatory high-frequency trading,” Mr. Schneiderman said in a speech on Tuesday at New York Law School in Manhattan.

Mr. Schneiderman’s office has met with the N.Y.S.E. and Nasdaq about these issues, according to a person briefed on the matter. The attorney general also plans to meet with operators of private trading platforms, known as dark pools, this person said. Goldman Sachs and Credit Suisse run the two biggest dark pools.

A spokesman for Nasdaq declined to comment, as did a spokeswoman for the IntercontinentalExchange Group, which owns the N.Y.S.E.

In redoubling his commitment to police these traders, Mr. Schneiderman is hoping to build on successes by his office since it announced the effort last year. Thomson Reuters, the financial information provider, agreed last summer to end its practice of selling speedy traders an early look at a closely watched survey of consumer confidence, after pressure from the attorney general.

Last month, Mr. Schneiderman applauded a decision by Business Wire to stop selling news releases directly to trading firms, a practice that gave the firms a short glimpse at the information before it hit the news wires. In addition, BlackRock, the giant asset manager, agreed to end its practice of surveying Wall Street analysts about companies they cover before their opinions were publicly released.

“My office will not sit by and tolerate the exploitation of unfair advantages that undermine our capital markets,” Mr. Schneiderman said on Tuesday.

In the space of a decade, high-speed trading using computer algorithms has grown from obscurity to become the dominant force in the market, now estimated to account for half of the shares traded in the United States. The new technology, coupled with new regulations, helped erode the old model of specialists who ensured the smooth functioning of the market.

Defenders of high-frequency trading argue that the practice makes trading cheaper and easier for investors large and small, enhancing liquidity. Manoj Narang, the chief executive of Tradeworx, a high-frequency trading company in New Jersey, criticized Mr. Schneiderman’s approach.

“People who take advantage of commercial offerings that are available on a widespread basis aren’t breaking any laws,” Mr. Narang said on Tuesday.

He added that preventing trading firms from placing their servers within exchange data centers would “set off a far more expensive arms race for physical proximity,” as firms buy real estate around the data centers and set up shop there.

But other investors portray high-frequency trading as a parasitic force in the market, shaving pennies from countless stock trades. Mr. Schneiderman said in his speech that high-frequency firms “appear to trade with virtually no risk.”

One such firm, Virtu Financial, provided a window into its strategy last week in a prospectus for its initial public offering. The firm said that out of 1,238 trading days through the end of last year, it experienced only one day of losses.

The firm said this was the result of “our real-time risk management strategy and technology.”

Bloomberg News reported on Mr. Schneiderman’s plans early on Tuesday morning.