New York Attorney General Eric Schneiderman is out again with another reminder that he doesn't like the way high-frequency traders operate. He believes they have unfair advantages, and that it's a bad idea for stock exchanges to sell them special services that cater to their wants. For that matter, so do I. So on that we can agree.
But Schneiderman also says there's something about these arrangements that might be illegal, without saying what it is. If that's true, he ought to spell it out. Instead, he's back to his old ways of threatening to investigate companies and maybe sue them for fraud unless they change their practices in a way that he deems acceptable. No matter how noble his intentions, this isn't how a law-enforcement officer should operate.
In Schneiderman's news release today on the subject of high-speed trading, he called for "tougher regulations and market reforms intended to eliminate the unfair advantages commonly provided to high-frequency trading firms at the expense of other investors." He said he would "continue to shine a light on unseemly practices that cater to high-frequency traders at the expense of other investors." He also said he is "committed to cracking down on fundamentally unfair -- and potentially illegal -- arrangements that give elite groups of traders early access to market-moving information at the expense of the rest of the market."
And there's the rub. It is Schneiderman's job to enforce the law and crack down on illegal behavior. It isn't his job to prosecute people for things that are fundamentally unfair and completely legal. Life is full of inequities. If he wants to change the rules governing high-speed traders and companies such as the Nasdaq Stock Market and the New York Stock Exchange, he should take it up with federal and state regulators and lawmakers.
The issues here are known. Schneiderman explained them well during a speech today at New York Law School, a copy of which was e-mailed to me by his spokesman: "The stock exchanges themselves are now selling high- frequency trading firms direct access to their data centers," Schneiderman said, as if he just discovered this. "For a fee -- typically thousands of dollars a month -- these firms are allowed to co-locate their computer servers within the exchanges' data centers. Having your trading computer physically within an exchange's data center reduces the time it takes market information to transmit between the two -- usually by milliseconds. This makes all the difference to high-frequency traders, who are uniquely able to maximize the value of co- location." He went on: "In that tiny sliver of time, these firms get a first look at the direct-data feeds provided by the exchanges. They see pricing, volume, trade and order information and use sophisticated technology to trade on it before others can possibly react."
And you know what? That is legal. Some people are faster than others at getting information that is legal for them to have. It has always been this way. In the old days, before telephones and trains, that speed difference could be weeks or even months. Today it's a matter of milliseconds. The investors who can afford to pay for that access are the ones that get it. Yes, that is unfair. But by itself it isn't the basis for a fraud investigation or the threat of a law-enforcement action.
If Schneiderman has a case to make against somebody, he should make it in court.