U.S. Atty. Gen. Eric Holder speaks during a House Appropriations subcommittee… (Michael Reynolds, European…)
If you're not investigating high-speed stock trading, you're missing one of the hottest trends on Wall Street.
Atty. Gen. Eric H. Holder Jr. announced Friday that the Justice Department is examining high-frequency trading for possible violations of antitrust and insider-trading laws.
When Justice Department investigators visit companies, they may bump into their compatriots from other state and federal agencies.
The FBI disclosed this week that it is in the middle of a months-long probe. The Securities and Exchange Commission is conducting its own investigation. So reportedly are the New York attorney general and the Commodity Futures Trading Commission.
None of the probes has yielded charges of wrongdoing.
"In the financial sector, concerns have been raised recently about a practice called 'high-frequency trading,'" Holder announced in testimony prepared for delivery before the House Appropriations Committee. "I can confirm that we at the Justice Department are investigating this practice to determine whether it violates insider trading laws.
"The department is committed to ensuring the integrity of our financial markets — and we are determined to follow this investigation wherever the facts and the law may lead," Holder said.
Holder, who has been under pressure from Democrats to crack down on Wall Street practices that hurt consumers and small investors, used the scheduled congressional hearing on the Justice Department's budget to make the announcement.
High-speed trading has existed in various forms for more than two decades, and concern about possible abuses has been around nearly as long.
The issue vaulted into the spotlight this week with the publication of a book alleging that shadowy trading firms have rigged the market.
"Flash Boys" garnered attention in part because it was written by Michael Lewis, a well-known chronicler of Wall Street whose 1989 book "Liar's Poker" is a touchstone among a generation of professional traders. He also penned "Moneyball" and "The Blind Side."
High-frequency firms use elaborate tactics, including hiring physicists and other scientists to predict split-second shifts in trading patterns.
Critics fear their algorithms have become so advanced that they have given traders an unfair advantage in predicting which way stocks will move. Skeptics also accuse high-speed firms of engaging in nefarious behavior, such as sending out bogus stock orders to gauge genuine investor demand for certain stocks.
Such tactics allow high-frequency traders to "front run" stocks, according to critics. Their systems detect that an investor wants to buy a certain stock. The trader swoops in to buy it first, then quickly sells it to the investor at a slightly higher price.
High-speed traders defend their industry, saying they simply harness publicly available trading information and don't engage in front-running or insider trading.
Many analysts agree with the basic gist of Lewis' argument: that savvy traders exploit loopholes that need to be closed. But they dispute the notion that the market has been fundamentally corrupted.