The investigation stems from the heavy crackdown on insider trading, which has led to 79 convictions of hedge fund traders and others. While the inquiry is still in its initial stages, investigators are looking at whether using such high-speed trading technology helps such traders make calls based on information other market players cannot access.
"There are many people in government who are very focused on this and who are concerned about it and who think it breaks the law," an FBI spokesman said. "There is a big concern that high-frequency traders are getting material nonpublic information ahead of others and trading on it."
The FBI is also looking at other types of trades, such as the placing of group orders and then canceling them, in order to simulate market activity. This could possibly be seen as market manipulation as many other traders will make trades based on this market activity.
The issue has been brought to the fore by New york Attorney General Eric Schneiderman who is investigating whether financial firms using high-speed trading technology are gaining an advantage over regular traders. Michael Lewis, noted author and financial journalist, made an appearance on CBS' 60 Minutes Sunday and said that such trading activities have ripped off investors and that the U.S. stock market is "rigged."
Schneiderman is also investigating the sale of products and services offering faster and richer access to stock information, which is almost never available to the public. Wall Street firms and other high-speed trading firms pay thousands of dollars for such services from companies, including the Nasdaq OMX Group Inc. and IntercontinentalExchange Group Inc.'s New York Stock Exchange.
The FBI's investigation has been ongoing for the past year and is largely focused on insider trading activities. Investigators say they are looking for trading patterns that could be questionable, but the difficult part is proving these trades were made with fraudulent intent.
[Wall Street Journal]