High-frequency traders and dark-pool operators should do “some soul-searching” and develop new ideas to improve their industry amid a probe, according to a top official in the New York attorney general’s office.
Chad Johnson, head of the state’s Investor Protection Bureau, told a conference yesterday that while Attorney General Eric Schneiderman examines trading practices, Wall Street should help by suggesting ways to change for the better. It would be a mistake to think concerns about stock-market fairness are just bad publicity or extreme language used by critics, he said.
“There’s more here than a public-relations issue, and the discussion ought to focus on the substance,” Johnson said at the event hosted by Sandler O’Neill & Partners LP. “There are real issues to work through, and we should do that without focusing on these kinds of rhetorical points.”
Man, Machine, and the U.S. Stock Market
Schneiderman’s office opened a broad investigation into whether U.S. stock exchanges and alternative venues such as dark pools provide high-frequency traders with improper advantages, Bloomberg News reported in March. His staff has spoken with executives at exchanges and subpoenaed high-frequency traders.
Johnson said questions include whether dark pools operate consistently with how they market themselves and observe their obligations to look after investor interests. Another concern is whether broker-dealers are directing trades to their own dark pools in ways that suggest conflicts of interests, he said.
He welcomed moves by some dark pools to make certain regulatory filings public. He said he hopes high-frequency trading firms and dark-pool operators “will engage in some soul-searching and step forward with ideas about how certain practices ought to be curtailed and reformed for the better.”
Investment Technology Group Inc. (ITG:US), Liquidnet Holdings Inc., KCG Holdings Inc. (KCG:US), Credit Suisse Group AG (CSGN) and Goldman Sachs Group Inc. have disclosed their Form ATS documents in the past month, which show their rules of operation.
“It’s about time that this trend started to take hold,” he said. “It’s unclear why it’s taken this long, but as we sit here today it’s still only a small minority.”
Schneiderman is investigating practices including exchanges’ sales of data feeds that reach firms sooner than the public. In response to a questioner who noted that the Securities and Exchange Commission oversees those feeds, Johnson said there may still be a need for scrutiny.
“I get the point that this is an area that’s regulated, but that alone doesn’t draw a line in the sand stopping the highest-ranking law-enforcement officer in the State of New York from looking further,” he said.
At a conference last month, Gregg Berman, one of the SEC’s top advisers on high-frequency traders and dark pools, defended the agency against at critics and “maybe an attorney general” who might think regulators don’t understand and aren’t keeping track of markets.
Johnson said his office can play a role alongside the SEC.
“They are the ones who promulgate the regulations, and we of course respect and acknowledge that,” he said. “We have worked very well either with the SEC or side-by-side with the SEC doing what we do, and they do what they do.”
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