Federal agents are investigating firms which receive information on forthcoming share orders moments before the orders arrive at exchanges.
The high-frequency traders (HFTs) then use the data to buy the stock before the first deal has been processed and sell it on to the original purchaser at a slightly higher price, a process known as “front-running”. They do this by exploiting the minuscule time differences that occur between different computers sending orders to buy or sell shares to stock exchanges.
HFTs – also known as “flash traders” – pay millions of dollars to ensure they have the fastest connections possible. They go as far as placing their computers inside stock exchanges and even laying hundreds of miles of high-speed fibre optic cable.
News of the investigation came as bestselling author Michael Lewis publishes Flash Boys: Cracking the Money Code, his latest book exposing Wall Street’s secrets. In it he tells how Brad Katsuyama, a New York-based trader, realises the market “knows” how he is about to trade before he makes a deal.
“There are two markets,” said Mr Lewis in a television interview. “The market moves at two speeds: one speed for people who pay for access to the exchanges, who put their trading machines right next to the black boxes that are now the exchanges, and everybody else.”
Full article: ‘Flash traders’ investigated by FBI as book blows lid on their methods to billion-dollar profits (The Telegraph)