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Dec 03, 2013

New York’s attorney general could once again shake up the lives of IROs

Eric Schneiderman sets his sights on HFT, data feed malfunctions and market manipulation

Tally it up: JPMorgan Chase settles mortgage-related claims for $13 bn; 13 banks and mortgage companies add $9 bn for auto-signing shoddy foreclosure practices; hedge fund SAC Capital forks out $1.8 bn to deal with insider trading charges; and banks in the UK and the Netherlands pay $1.5 bn – and counting – for their role in the LIBOR fixing scandal. This year could almost be billed as the year of the mega-settlement, so 2014 may shape up as the year the sheriff rides (back) into town.

New York State Attorney General Eric Schneiderman, speaking to a recent gathering of business and financial writers in New York, spelled out several targets he has in his sights, with the aim of sending the message to Wall Street that ‘no one is above the law’.

So why should IROs care what a state attorney general thinks about high-frequency trading (HFT), or any topic, for that matter? Aren’t attorneys general known for targeting headline-grabbing issues: insurance fraud, elder abuse, bogus charities? Well, the New York office is different, often described as the Sheriff of Wall Street because of its proximity to the financial hub and its mandate to protect New York citizens and public pension funds from financial fraud.

A self-described liberal Democrat elected in 2010 as chief prosecutor for the state of New York, Schneiderman occupies the same position Eliot Spitzer held when his investigation into equity research abuses led to the global research analyst settlement. That arguably altered the IR landscape more than any other single development over the past decade, breaking the connection between banking and research and forever changing the research business model.

A handful of state attorneys general, including Schneiderman, unhappy with the performance of the federal authorities in not holding mortgage lenders more accountable for shoddy foreclosure and refinancing practices, extracted a $25 bn settlement in 2012 from the largest industry players. Just days before he addressed the financial writers, Schneiderman announced he was suing Wells Fargo for not honoring the terms of the settlement. So it’s an office with not just a voice, but also teeth.

While touching on several topics, Schneiderman took special aim at the subset of high-frequency traders, who practice what he terms ‘insider trading 2.0’. Some traders, addicted to ‘speed and greed’, are ‘far more dangerous’ than the traditional friends-and-family variety of insider trading violators, he said. ‘Small but powerful groups of high-speed traders’ leverage their privileged access to market-moving information, measured in milliseconds, putting ‘an invisible thumb on the scale of the markets’.

Schneiderman pointed proudly to Thomson Reuters voluntarily suspending its long-standing practice of giving a two-second head start to high-paying subscribers on release of a market-moving economic indicator after his office began investigating the practice. That move had ‘an immediate effect on the market,’ he claimed. His office tracked one unnamed exchange-traded fund that would previously trade up to 200,000 shares in that two-second window. Trading by the same fund in the same window ‘virtually stopped’ after the news outlet suspended early release, Schneiderman said.

HFT is not the only area the outspoken prosecutor is looking into. ‘We still don’t have all the answers’ behind the data feed malfunction at NASDAQ last summer that resulted in the market shutting down for several hours, he said. Market manipulation through abuse of social media is also in his sights: he recalled how a hacked Associated Press Twitter feed, falsely reporting explosions at the White House that injured the president, sent the Dow plunging 140 points.

Acknowledging that even the Sheriff of Wall Street has his limits, Schneiderman concluded with a plea for help. ‘There is only so much regulators and prosecutors can do’ in policing complex financial markets, he said, urging ‘responsible actors’ in financial services to weed out the bad actors.