As Promised, The New York Attorney General Has Begun His War On High Frequency Trading Firms

New York Attorney General Eric Schneiderman has subpoenaed a number of high frequency trading firms for information on their "special relationships" with exchanges and dark pools, Bloomberg reports.

Dark pools are private exchanges where investors can trade stocks anonymously. The HFT firms that Schneiderman is targeting are Tower Capital Research, Chopper Trading, and Jump Trading.

Last month Schneiderman declared war on HFT firms saying that some of their practices were "fundamentally unfair - and potentially illegal - situations that give elite groups of traders early access to market-moving information at the expense of the rest of the market."

What the AG could be looking for are "trade through violations,"allowing high frequency trading firms to know the best price of a security before it's even processed by the exchange.

There is a regulation that requires stock exchanges to execute all trades at the National Best Bid and Offer - the NBBO. The NBBO is the national price for any stock. Exchanges do this by aggregating bids and offers all over the market and finding the most precise price based on that demand.

HFT critics believe that some exchanges may be allowing HFT firms to get a jump on the aggregation process, technically allowing them to trade the NBBO before it's the NBBO.

You follow?

What regulators don't want is for there to be two prices in the market - one for HFTs and one for everyone else.

We'll let you know more when Schneiderman makes his announcement. And knowing him, he will make it loud.