The Federal Bureau of Investigation has openly solicited traders and stock-exchange workers to blow the whistle on possible front-running and manipulation via high-speed computers.
The FBI joins a roster of authorities examining high-frequency trading, in which firms typically use super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies. The strategy to invite whistleblowers was prompted in part by the complexity of proving any misconduct, according to a person with direct knowledge of the matter.
Securities and Exchange Commission Chair Mary Jo White told lawmakers today that the agency is conducting “a number” of enforcement investigations of high-frequency and automated trading.
“We are pretty much focused on any abuses in that space,” White told a House Appropriations subcommittee.
Whistleblowers are ready to step forward from stock exchanges, Michael Lewis, author of “Flash Boys,” said in an interview on NBC’s Today Show. The FBI is encouraging anyone with knowledge of possible misconduct to contact them, according to an FBI spokesman.
The FBI’s inquiry stems from a multiyear crackdown on insider trading, which has led to at least 79 convictions of hedge-fund traders and others. Agents are examining, for example, whether traders abuse information to act ahead of orders by institutional investors, according to the FBI. Even trades based on computer algorithms could amount to wire fraud, securities fraud or insider trading.
New York Attorney General Eric Schneiderman opened a broad investigation into whether U.S. stock exchanges and alternative venues give such traders improper advantages. The SEC is taking a “data-driven” approach to consideration of new rules and is “on top of” worries about the fairness of high-frequency trading, White said.
Regulators have focused for years on whether high-speed trading hurts market stability. More recent law enforcement investigations are shifting the focus to unfair practices and possible criminal activity.