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Reports US

US stock market daily report (April 01, 2014, Tuesday)

April 2, 2014, Wednesday, 05:18 GMT | 00:18 EST | 08:48 IST | 11:18 SGT
Contributed by Millennium Traders

High-speed trading (HST) or high-frequency traders (HFT) firms have been the target of a probe by the Federal Bureau of Investigation, for nearly a year. Additional firms involved in the investigation by the FBI include proprietary-trading firms who trade strictly for their own account and fast-moving broker operations that buy and sell orders on behalf of clients such as mutual funds and pension plans. The investigation is looking into whether HST/HFT firms are engaging in insider trading activity by taking advantage of fast-moving market information that is unavailable to other investors or traders. HST/HFT firms activities being investigated by the FBI include a wide range of trading activity including whether HST/HFT firms are making trades ahead of other investors, based on information other market participants can not see, which could indicated insider trading.

An official spokesman for the FBI said, "There are many people in government who are very focused on this and who are concerned about it and who think it breaks the law. There is a big concern that high-frequency traders are getting material nonpublic information ahead of others and trading on it."

Both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are investigating ties between HST/HFT and major exchanges as to whether HST firms receive preferential treatment that puts other investors at a disadvantage. The FBI and the SEC have developed fact patterns of potentially illegal trading which are then presented to prosecutors who determine whether the info could be used in a criminal case. The investigation will probe high-speed trades made by computer programs which, creates a challenge for the FBI to detect criminal activity and prove intentional execution. The Justice Department is working with the SEC, CFTC and Financial Industry Regulatory Authority on the investigation with the FBI. The investigation is known as the 'High-Speed Trading Initiative' which is focusing on whether the waves of orders that flood the market from HST/HFT firms are being used to manipulate prices to their benefit.

CFTC is investigating whether HST/HFT firms routinely distort futures markets by acting as buyer and seller in the same transactions. Such trades are known as 'wash trades' which are illegal and banned by U.S. law because they feed false information into the markets that manipulate prices.

New York Attorney General Eric Schneiderman said, "People will benefit to varying degrees by calling us at an early stage." Leads from traders or others who have participated in illegal activity are welcomed by investigators. Schneiderman has opened an investigation into whether HST firms have gained advantages unavailable to regular investors, in recent months. For years, market regulators have been investigating high-frequency trader activity to determine whether they have unfair advantages over other investors.

Due to the size and scope of the probe, a large number of agents are involved in the investigation by the FBI as they look into whether some HFT brokers trade on information about client orders before executing them. Additionally, the probe involves whether brokers use information obtained during after-hours trading, to beat the market when it opens for trading the following market session. An activity frequented by HST that remains under intense scrutiny by the FBI includes their practice of placing a group of trades followed by a quick cancellation of the same group of trades to create a false sense of market activity which is considered market manipulation. The investigation is also looking into whether HST by certain firms is done to conceal potential trades made on illegal tips. Trading patterns are being investigated by FBI officials, for those that could reveal whether any trading activities in question, violate the law. For those patterns found in question, the FBI would have to prove that the HFT firm made the trades, with fraudulent intent.