A.G. Schneiderman Highlights Growing Threat Early Access To Market-Moving Data & High-Frequency Trading Pose To U.S. Markets, Announces Confidential Hotline For Reporting Abuses
At Bloomberg Markets 50 Summit, Attorney General Urges Industry Insiders To Report Incidents Of New Form Of "Insider Trading 2.0"
Schneiderman: "Blinding Speed Coupled With Early Access To Data Gives Small Groups Of Traders The Power To Suck All The Value Out Of Market-Moving Information Before It Goes Public"
NEW YORK - Attorney General Eric T. Schneiderman today highlighted the threat to our financial markets posed by the toxic combination of high-frequency trading, the potentially illicit sale of early access to market-moving information, and so-called "front-running" schemes that major hedge funds use to get early access to analyst reports. During remarks at the annual Bloomberg Markets 50 Summit today, Attorney General Schneiderman noted that this new form of "Insider Trading 2.0" undermines confidence in the markets by setting up a small minority of traders to receive enormous profits at the expense of the rest of the market.
The Attorney General announced that his office has set up a hotline for financial industry insiders to confidentially report improper or illegal conduct. He asked for anyone who knows of wrongdoing - be it front-running, trading in illicitly gained confidential information, or selling early access to market-moving data - to come forward and call 800-771-7755.
"When blinding speed is coupled with early access to data, it gives small groups of traders the power to manipulate market movements in their own favor before anyone else knows what's happening," said Attorney General Schneiderman. "They suck the value out of market-moving information before it even goes public. That's 'Insider Trading 2.0, and it should be a huge concern to anyone who cares about the markets and the free flow of capital on which our economy depends."
Earlier this year, Attorney General Schneiderman announced that his office had secured an interim agreement with financial information giant Thomson Reuters to discontinue its practice of providing high-frequency traders with a two-second sneak peek at certain market-moving consumer survey results. Prior to this agreement, Thomson Reuters was selling early access to the University of Michigan Survey of Consumers, one of the most closely watched indicators of consumer sentiment in the United States.
Comparing trading volumes before and after the agreement was signed gives an idea of how powerful that two-second advantage was. One year before the agreement took effect, 200,000 shares of a leading Standard & Poor's 500 fund were traded in the first 10 milliseconds of that two-second period. After the agreement, trading in that fund during those same 10 milliseconds dropped to 500 shares.
The Attorney General's investigation into the scope and impact of this practice is ongoing.
In his remarks, Attorney General Schneiderman also addressed a similar practice, in which certain companies seek to gain early access to analyst assessments of the companies they cover and use that information to manipulate the markets. Companies that gain early access to analyst sentiments that can be market-moving before they are officially released can "front-run" the market and gain an unfair advantage over the competition. When a firm can accomplish this and plug the early data into a trading model that utilizes high-frequency trading, the unfair advantage can be a windfall at the expense of the rest of the market.
Since federal and state regulators face many challenges in tracking and preventing these new forms of "Insider Trading 2.0," the Office of the Attorney General has established a hotline for financial industry insiders to confidentially report improper or illegal conduct. Anyone who knows of front-running schemes, efforts to trade in illicitly gained confidential information, or selling early access to market-moving data is asked to call 800-771-7755.
For the full text of Attorney General Schneiderman’s remarks to the Bloomberg Markets 50 Summit, click here.