FBI Probes Possible High-Speed Trading, Insider Trading Link

The Federal Bureau of Investigation is continuing to look at whether high-speed trading firms are insider trading when they avail of fast-moving market data to which other investors don’t have access. The agency is concern that the limited availability of material nonpublic information could be placing these traders at an advantage, including giving them access to extremely rapid data feeds. The probe is called the High-Speed Trading Initiative.

Since computer programs initiate high-speed trades, it can be harder to identify suspect activities and prove that they were done on purpose. According to The Wall Street Journal, FBI officials are looking for patterns to indicate that any trading activities took place that might have broken the law. The government would then have to prove that fraudulent intent was a factor.

Trading activities under examination include the placing of trades in groups and then cancelling them to make it appear as if market activity actually went on. This type of practice could potentially be considered market manipulation because others might buy trades because of these false orders. Also under scrutiny is the use of high-speed trade orders to hide that transactions are a result of an illegal tip.

The FBI wants to know whether some brokers trade on data about client orders before making them and if they use data about after-hours trading to defeat the market the next day. Proprietary-trading outfits that trade only for their account, and pension plans, mutual funds, and other rapidly moving broker operations that purchase and sell orders for clients are among those getting a closer look during the probe.

Investigators involved in the High-Speed Trading Initiative also wants to find out whether the barrage of orders that enter the market from high-frequency firms are being manipulated pricewise for the companies’ benefit. Those who participated in such illegal activity or know of others that have used high-frequency trading to their benefit will reportedly benefit if they step forward on their own. The US Department of Justice said it is working with the Commodity Futures Trading Commission, the Securities and Exchange Commission, and Financial Industry Regulatory Authority to look into the matter.

Although the investigation was started last year, it has grown in intensity in recent months in the wake of the closer scrutiny of computerized trading. Also, the SEC and the CFTC are examining links between major exchanges and high-speed traders and whether the firms are getting favored treatment over other investors. The SEC is trying to find out if high-speed firms used order types to get ahead of other investors. Meantime, the CFTC wants to know if high-frequency firms are distorting futures markets on a regular basis by serving as seller and buyer of a transaction. Known as wash trades, this is illegal.

The SSEK Partners Group is an institutional investor fraud law firm.

FBI Investigates High-Speed Trading, The Wall Street Journal, March 31, 2013

Federal Bureau of Investigation

FBI Seeks Help From High-Frequency Traders to Find Abuses, Bloomberg, March 31, 2013

High-Speed Trading Is Turning Wall Street Into a Casino, Time, April 1, 2014

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