Concerned about possible insider trading, the Department of Justice is investigating the "high-frequency trading" practiced by some investors, Attorney General Eric Holder confirmed Friday.
Holder's acknowledgment comes on the heels of a report from CBS News Homeland Security Correspondent Bob Orr that the FBI is probing the practice to determine whether high-frequency traders are using a speed advantage to tilt investment markets in their favor.
"In the financial sector, concerns have been raised recently about a practice called 'high-frequency trading,'" Holder said during testimony before a House Appropriations subcommittee. "The practice, which consists of financial brokers and trading firms using advanced computer algorithms and ultra-high speed data networks to execute trades, has rightly received scrutiny from regulators. I can confirm that we at the United States Department of Justice are investigating this practice to determine whether it violates insider trading laws. The Department is committed to ensuring the integrity of our financial markets, and we are determined to follow this investigation wherever the facts and the law may lead."
The concern is that some traders could be using information that they receive just a fraction of a second before everyone else to decide what to buy and sell and when -- and on Wall Street, where milliseconds can mean millions, that could provide quite the advantage. Critics have said that high-speed traders are able to see the orders of other investors before those orders are filled and execute trades that result in high profits for themselves and higher stock prices for everyone else.
In his new book "Flash Boys," author Michael Lewis warns that a group of high-frequency traders have effectively rigged the market to their advantage by using computer software not available to smaller investors.
Lewis spoke to "60 Minutes" about his book, telling CBS News' Steve Kroft in no uncertain terms that "the United States stock market, the most iconic market in global capitalism, is rigged...by a combination of these stock exchanges, the big Wall Street banks, and high-frequency traders."
The victims, Lewis said, are "everybody who has an investment in the stock market."
At over 60 public and private exchanges throughout the U.S., thousands of computers are executing trades at speeds far beyond human capability, far too quickly to be recorded on a stock ticker or computer screen.
"The insiders are able to move faster than you," Lewis explained. "They're able to see your order and pay it against other orders in ways that you don't understand. They're able to front run your order."
"What do you mean 'front run'?" Kroft asked.
"Means 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 said. "It all happens in infinitesimally small periods of time. There's speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it's enough for them to identify what you're gonna do and do it before you do it at your expense...So it drives the price up, and in turn you pay a higher price."
What's not clear is whether the practice is illegal, but that possibility became more pronounced on Friday with Holder's confirmation of a federal investigation.
New York Attorney General Eric Schneiderman and the Commodities Futures Trading Commission had already launched their own investigations into the rapid computerized stock trading, which now comprises over half of total bandwidth of the market.
A law enforcement official told CBS News' Orr that the investigation actually began last year, and due to the complicated nature of the issues involved, it could take many more months before it reaches any conclusion.
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