THE BLOG
10/09/2013 09:31 am ET Updated Dec 09, 2013

Long Arm of the Law Catches Up to High-Speed Trading: Attorney General Eric Schneiderman

At the Bloomberg Link Markets 50 Summit, New York State Attorney General Eric Schneiderman made a point that he has set out to level the playing field for all investors versus high-speed trading in the stock market.

At odds was a two second gap, a delay, that empowered Thomson Reuters' "elite traders" to pay for special access, according to document that had been obtained by CNBC back on June 10 in an article Early Advantage.

For Eric Schneiderman it was about closing that special access loop, which excluded most investors and gave unfair advantage to Thomson Reuters' pay-for-play traders. From his interview with Matt Winkler, Editor-In-Chief of Bloomberg News, the Attorney General achieved his goal by negotiating an agreement with the business intelligence solutions provider, as Thomson Reuters now deems itself, to abandon the unfair market advantage.

But did that really close the gap?

In Eric Schneiderman's view, he leveled the playing field by eliminating the special practice.

"When blinding speed is coupled with early access to data, it gives people the power to suck value out of the markets before it even hits the rest of the street," the Attorney General explained. "So the power to skew data--to give you a concrete example--was exactly the service that Matt's old friends at Thomson Reuters provided to select customers using data from the University of Michigan Consumer Survey. The reason my office began an investigation into this was our emerging awareness of the problems of insider trading 2.0. And I'm sure some of you have heard about that investigation."

So what happened?

"Thomson Reuters was selling investors access to the University of Michigan's surveys market-moving information five minutes before it was released to the general public," Schneiderman said. "But Thomson Reuters was also selling to an even more elite group of clients an earlier glimpse, and for a substantial extra fee, these elite market-movers were allowed to see the data two seconds before the customers who thought they were first in line who got it five minutes before the general public. Two seconds is a lifetime in the world of insider trading 2.0."

The 'Growing Threat of Early Access to Market'
In the era of high-speed trading, two seconds has become an eon. By doing away with that advantage, it did make the playing field more flat, but yet it didn't flatten it completely. The reason for that comes down to technology of where data is stored, accessed, and computed on those strings of flash trading algorithms. More on that in a moment.

"The United States is a market economy, one that is increasingly an information economy. In a market-driven information economy, information is for sale," said Anders Corr, a Harvard University PhD, author, and founder of Corr Analytics, Inc., an advisory firm to governments and business clients on international geopolitical risk.

I met Dr. Corr at the Markets 50 Summit. In a follow up interview I asked him to comment on Attorney General Schneiderman's aim to patch the gap between the elite traders and investors.

He said, "Old information is worth less than new information. It is inconsistent with a market economy to target innovative forms of information delivery, including time-tiered subscription systems for high frequency algorithmic trading. Thomson Reuters (TRI) has suspended the 2-second advance sale of the University of Michigan (UM) data pending negotiations. But TRI and UM have clear Constitutional backing from both right-to-property and freedom-of-speech perspectives. The 2-second lead pricing provides more funds for UM researchers, and downwards pressure on prices for customers who do not need the 2-second lead. The Attorney General is misusing taxpayer dollars on this investigation, and should end it immediately. In this case, the market works better than government. UM and TRI should be able to sell their information in any way they see fit, as long as they disclose the pricing structure to all market participants."

From a technology vista, closing the gap on high-speed trading between the traders, who leverage the algorithms, and the big data to crunch the millions of trades in milliseconds, doesn't work. It might be good PR for the Attorney General, but it doesn't close the door all the way.

The Low Latency of High-Speed Trading
The reason for that is most cloud datacenters are located in very close proximity of the Wall Street stock exchanges, clearing houses, and investment banks.

The reason for that is, even at the speed of light for which information travels in packets around the Internet--or seven times around the world in one second--there are numerous bends, switches, and routers to funnel through. Add bandwidth bottlenecks and massive traffic flows of data to that stream and the imperceptible problem to the human eye of delays measured in fractions of a second becomes that much more acute.

But the delivery of information slowed across the global connected network can be overcome with a "last mile" advantage of storing, computing, and accessing data in the cloud in the same zip code as where the trades are placed and executed.

That last mile also achieves the cloud computing term of "low latency," of the time a packet of data or message takes to travel through the Internet.

With Wall Street traders hosting their data on clouds either on-premise or with cloud service providers, such as Datagram, PEER 1 Hosting, CoreSite, among others, Thomson Reuters and other trading firms and platforms still have a huge advantage over the typical investor or trader located outside downtown Manhattan.

That is a fact Attorney General Schneiderman, as a lawyer most likely has little expertise in or knowledge. So as he states that he has solved the unfair practice, he did close the door on the two-second head start, but he didn't shut it all the way.

Low latency is still king in the financial industry and will remain in high demand.

From the Attorney General's press release following the Bloomberg Link Markets 50 Summit:

"The Attorney General announced that his office has set up a hotline for financial industry insiders to confidentially report improper or illegal conduct. He asked for anyone who knows of wrongdoing--be it front-running, trading in illicitly gained confidential information, or selling early access to market-moving data--to come forward and call 800-771-7755."