Trading probe breaks string of gains for US exchange operators

Things had been improving for US stock exchanges, with volume rising, the bull market entering its sixth year and investors coming back to the market.

By Gerrit De Vynck And Lu Wang (Bloomberg)

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Published: Thu 20 Mar 2014, 10:17 PM

Last updated: Sat 4 Apr 2015, 4:50 AM

The run of luck was broken yesterday by New York Attorney General Eric Schneiderman, who is probing whether US markets are giving high-frequency traders unfair advantages by offering faster access and data than is normally available to the public. Nasdaq OMX Group’s stock fell the most in seven months.

For exchange executives, Schneiderman’s inquiry threatens to revive public scrutiny that peaked in the aftermath of the 2010 flash crash, when the Dow Jones Industrial Average fell almost 1,000 points in a matter of minutes. It’s raising questions about the fairness of markets just as Virtu Financial., a high-frequency trader that has earned money every day but one for five years, prepares for an initial public offering.

“The investigation is totally appropriate,” Brian Barish, who helps oversee about $10 billion as president and chief investment officer of Denver-based Cambiar Investors LLC, said in a phone interview. “There is something ethically wrong with providing a certain group of individuals preferential access to information and preferential timing.”

Schneiderman’s investigation threatens to disrupt a model that market regulators have permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions.

Shares of New York-based Nasdaq OMX fell 3.1 per cent on Tuesday after Schneiderman’s review came to light, the most since August 22, when a technical malfunction at the exchange forced it to temporarily halt trading for thousands of companies. Atlanta-based IntercontinentalExchange Group, the owner of the New York Stock Exchange, lost 1.5 per cent.

“We publicly file with the SEC for each and every one of these services, and we’re always engaged with government officials around the world,” Robert Madden, a spokesman for New York-based Nasdaq, said in a phone interview, referring to the US Securities and Exchange Commission. He and Eric Ryan, a spokesman for NYSE, declined to comment on Schneiderman’s investigation. Madden also declined to comment on the drop in his company’s stock, as did ICE’s Kelly Loeffler.

The investigation comes amid a rally that lifted shares of the biggest market operators in 12 of the last 15 months. The Bloomberg World Exchanges Index of 26 stocks has advanced 45 per cent since sinking to an eight-month low in June 2012, a period that encompasses ICE’s takeover of NYSE Euronext and about $110 billion of inflows into mutual and exchange-traded funds that own US equities.

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