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Reports US

US stock market daily report (March 18, 2014, Tuesday)

March 19, 2014, Wednesday, 05:48 GMT | 01:48 EST | 10:18 IST | 12:48 SGT
Contributed by Millennium Traders

Office of New York Attorney General Eric Schneiderman is addressing concerns to U.S. stock exchanges over unfair advantages of high-frequency traders or high-speed traders. On Tuesday, Schneiderman requested an investigation into limiting services to high-frequency traders, by U.S. stock exchanges and alternative trading venues. Schneiderman also concedes that the services provided to high-frequency traders undermines confidence in the markets.

High-frequency traders are permitted by the stock exchanges to locate their computer servers within trading venues, armed with extra network bandwidth and high-speed switches that give them access to pricing, volume and order information ahead of others. Into question by Schneiderman includes the practice of "co-location" which allows firms who pay a fee which typically runs into thousands of dollars each month, in order to locate their computer servers within the exchanges' data centers.

In prepared remarks at a symposium hosted by New York Law School Schneiderman said, "Rather than curbing the worst threats posed by high-frequency traders, our markets, as structured today, are increasingly too focused on catering to them." To ensure a level playing field for all investors, Schneiderman has placed the stock exchanges as well as alternative trading venues under scrutiny and has begun meetings with all parties to discuss reforms needed.

Proposals for reforms for stock exchanges from Schneiderman include proposals such as that from University of Chicago economists that, orders be processed in batches rather than continuously, to ensure that price trumps technology in deciding who obtains a trade.

Co-location permits "predatory" high-speed traders or high-frequency traders to gain an edge in milliseconds for transmission time, allowing the traders to benefit while all other traders and the rest of the market, suffer. Schneiderman said the same group of traders look for arbitrage opportunities between and among venues to capture momentary differences in stock prices. These minute differences, as a result of speed due to co-location, are not allotted to other traders on the exchanges - thus the unfair trading advantage. Additional actions taken by the high-speed or high-frequency traders includes artificially inflating prices by detecting a large trade from an institutional investor thus, positioning themselves on the other side.

Routing orders into alternative venues such as "dark pools", which are less regulated by the Securities and Exchange Commission, are targets for hidden orders from institutional investors who try to escape the high-speed or high-frequency traders who are monitoring orders placed.

Another investigation in progress by Schneiderman includes high-speed or high-frequency traders early access to data. During February 2014, Berkshire Hathaway's Business Wire agreed to no longer sell potentially market-moving press releases directly to high frequency-trading firms after months of discussion with the New York Attorney Generals office.

BlackRock, Inc. (BLK-NYSE), the worlds largest asset manager, agreed in January 2014 to terminate its analyst survey program worldwide. Participation in such programs has also been terminated by at least 18 brokerage firms including Citigroup Inc. (C-NYSE), Goldman Sachs Group, Inc. (GS-NYSE) and JPMorgan Chase & Co. (JPM-NYSE).

In response to the probe from Schneiderman's office, Thomson Reuters said it would suspend its early release of the widely watched Thomson Reuters/University of Michigan consumer sentiment data to a small group of clients, in July 2013.