HFT firms Considered Subpoenaed in NY Probe

New York’s attorney-general has sent subpoenas to six high-frequency trading firms as its investigation into whether certain traders come with an unfair advantage over others widens past the stock markets.

The office of Eric Schneiderman last week sent subpoenas to six trading firms, including Tower Research, Chopper Trading and Jump Trading, an individual acquainted with the matter said. The identity from the other three firms couldn’t immediately be identified. A seventh high-frequency trading firm received instructions, this person said.

Last month Schneiderman declared war on HFT firms, saying that some of their practices were “fundamentally unfair – and potentially illegal – situations that give elite groups of traders early use of market-moving information in the cost of the rest of the market.”

What the lawyer general might be searching for is “trade through violations,” which allows high-frequency trading firms to understand the best price of a security before it’s even processed by the exchange.

There is really a regulation that needs stock exchanges to complete all trades at the National Best Bid and Offer, or NBBO. The NBBO may be the national price for just about any stock. Exchanges do this by aggregating bids while offering all around the market and finding the most precise price based on that demand.

HFT critics believe some exchanges might be allowing HFT firms to obtain a hop on the aggregation process, technically letting them trade the NBBO before it’s the NBBO. You follow?

What regulators don’t want is perfect for there to become two prices in the market, one for HFTs and something for everybody else.

We’ll let you know more when Schneiderman makes his announcement. Knowing him, he will make it loud.