Regulators monitoring Goldman Sachs’ high-frequency trading

05/09/2014 1:45 PM

05/09/2014 1:56 PM

Federal regulators are scrutinizing Goldman Sachs’ high-frequency trading operations, the latest crackdown on what the government sees as potential market manipulation by some of Wall Street’s biggest banks.

In recent months, federal authorities have ramped up their scrutiny of high-frequency trading, a general term used to describe methods by which firms can buy and sell stocks before other investors.

In April, Attorney General Eric H. Holder Jr. confirmed that the Justice Department was investigating high-speed trading “to determine whether it violates insider trading laws.” Eric T. Schneiderman, the New York attorney general, has called the practice “Insider Trading 2.0.”

Goldman disclosed that it was under investigation in a regulatory filing Friday but did not identify by which agency. The filing also confirmed that the bank was under investigation for potential violations of the Foreign Corrupt Practices Act, including its hiring practices abroad.

In addition, Goldman said in the filing that it expects its litigation expenses to remain “high” and disclosed that it had increased its reserves to pay for legal expenses to $3.7 billion from $3.6 billion.

A spokesman for Goldman declined to comment.

High-frequency trading has drawn criticism for being unfair because even a fraction of a second’s advantage can mean the gain or loss of millions of dollars. That criticism has grown louder amid concerns that regulation to keep markets fair has not kept up with advances in the technology that makes such trading possible.

Goldman has not been on the sidelines. In March, Gary Cohn, Goldman’s chief operating officer, wrote an op-ed article in The Wall Street Journal that proposed ways to rein in potential trading abuses.

“While an industry-based solution is preferable, some issues cannot be addressed by market forces alone and require a regulatory response,” Cohn wrote. “Innovation is critical to a healthy and competitive market structure, but not at the cost of introducing substantial risk.”

The article preceded reports in April that Goldman was in talks to sell its so-called dark pool high-frequency trading operation, also known as Sigma X. Harvey Schwartz, the bank’s chief financial officer, subsequently denied that the bank had plans to sell the unit.

Author Michael Lewis also brought widespread attention to the controversial methods of high-speed traders in his recent book “Flash Boys,” which describes the practices of high-frequency trading.

Last month, the city of Providence, R.I. sued Lenexa-based Bats Global Markets Inc., Kansas City-based Tradebot Systems Inc., and other U.S. stock exchanges as well as many brokerage firms and trading firms involving allegations of high-frequency trading. Bats and other defendants have declined to comment on the suit.

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