Regulators have sharpened scrutiny of high-speed trading in the wake of criticism that architects of the cutting-edge practice have rigged the market against ordinary investors.
The issue was vaulted to the forefront of public debate by best-selling business author Michael Lewis, who published a book Monday arguing that the stock market has been "rigged" against small investors by stock exchanges, large Wall Street banks and high-speed traders.
The FBI acknowledged that it has undertaken a probe of high-speed trading, while the head of the Securities and Exchange Commission pointed to its own probes a day later on Tuesday.
The New York attorney general and the Commodities Futures Trading Commission are also investigating.
In "Flas Boys: A Wall Street Revolt," Lewis recounts the story of Brad Katsuyama, a Royal Bank of Canada trader who was puzzled about why his stock transactions became more costly after they were ordered.
After investigating the trades, Katsuyama blamed high-speed traders, who employ algorithmic formulas and whip-speed transmission lines to buy and sell stock.
"It all happens in infinitesimally small amounts of time," Lewis said in an interview about his book Sunday on the "60 Minutes" television news program.
They're able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price."
Lewis joins a chorus of critics who say high-speed trading firms have tilted the market to win commissions and guaranteed profits at the expense of average investors.
Critics argue that high-speed trading firms have succeeded by building computer servers in close proximity to key trading hubs in New York and Chicago and, in some cases, in the exchanges themselves.
- Haves and have-nots -
"The US stock market was now a class system of haves and have-nots, only what was had was not money but speed (which led to money). The haves paid for nanoseconds; the have-nots had no idea that a nanosecond had value," Lewis wrote in the book.
But supporters of high-speed trading say Lewis and others are mischaracterizing how the technology functions and the intent behind the system. They also note that some of the most criticized practices are entirely legal.
For example, leading exchanges do permit high-speed traders to station equipment on site, but say such a benefit is open to any investor.
"Those are services that according to our regulator we have to offer equally to all types of traders, including retail investors," said a person familiar with the exchanges' thinking who requested anonymity. "Everybody can enjoy those services if they pay."
"It is unfair and irresponsible to say that the stock market is rigged simply because some market professionals use technology and enhance competition," said William O'Brien, president of BATS Global Markets.
O'Brien and other high-speed advocates say that high-speed trading is essential to providing market liquidity and to conduct efficient trades. The firms play an important role between those who hold the stock and those wishing to buy.
Katsuyama, who has joined Lewis at times during this week's book-promotion media blitz, left RBC to launch his own exchange.
IEX bills itself as the first equity trading venue owned by buy-side investors and a company that exists for "institutionalizing fairness in the markets," according to its website.
The exchange employs a 350-microsecond delay between taking orders and executing the trade in order to ensure all parties are on the same plane.
Lewis and others see IEX's arrival as a sign of how Wall Street is changing.
But others question whether IEX is even needed. Defenders of high-speed trading say firms that poorly serve their clients are already being pushed out of the market.
Larry Tabb, founder of consultancy TABB Group, said the market for high-speed trading peaked in 2009 and revenues have declined every year since then. Smaller firms are suffering due to the rising cost of doing business.
"Brokers are doing a better job at protecting the customer," Tabb said.
He pointed to the usual "leakage" of money to high-speed firms, although such firms play an important role in price discovery.
"To say the market is rigged or that they don't truly reflect supply and demand is inaccurate," Tabb said.