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New York’s Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than is normally available to the public. Wall Street banks and rapid-fire trading firms pay for these services, providing millions of dollars in quarterly sales to exchanges and helping ensure their markets are supplied with standing orders to buy and sell stocks.

Bloomberg LP, the parent of Bloomberg News, provides its clients with access to some proprietary exchange feeds.

The investigation threatens to disrupt a model that market regulators have permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions.

High-frequency-trader Virtu publicly released its initial public offering filing in March. The New York-based market maker, which provides quotes in more than 10,000 securities and contracts on more than 210 venues in 30 countries, said it had turned a profit every day except one for five years. The company uses IEX.

CFTC Review

Virtu disclosed in the IPO filing that the U.S. Commodity Futures Trading Commission is looking into its trading from July 2011 to November 2013, examining its “participation in certain incentive programs offered by exchanges or venues,” according to the IPO filing. Virtu said it doesn’t believe it broke any laws or CFTC rules.

Chris Concannon, Virtu’s president and chief operating officer, declined to comment before the “60 Minutes” broadcast, citing rules that prevent companies from speaking while planning IPOs.

Share volume totals show the transformation that high- frequency firms have wrought in American equity markets. While combined trading on the NYSE and Nasdaq rarely exceeded 2 billion shares in the 1990s, today it is regularly three times that in the U.S. About 6.05 billion shares changed hands on all U.S. exchanges in the last session, data compiled by Bloomberg show.

‘Not Rigged’

Not everyone says speed trading is unfair.

“While there are bad actors in every industry, the game is not rigged in the favor of professional traders who employ HFT to execute their strategies,” Peter Nabicht, senior adviser to the Modern Markets Initiative trade group and former chief technology officer at high-frequency-trading firm Allston Trading, wrote in an e-mail.

“Rather, they work hard to compete with each other to bring liquidity to the markets, benefiting average investors,” he added. “Continued debate about the next evolution of market structure is needed and welcome, provided the debate is based on fact and resulting actions are reasoned, ensuring average investors continue to benefit from the transparency and efficiency enabled by inevitable technological advances.”

Encouraging Trades

The practice of selling enhanced access to brokers accelerated as American exchanges evolved from member-owned firms amid a flurry of regulation and computer advances in the 1990s. Among other changes, the government-mandated compression of stock price increments to pennies from eighths and sixteenths of a dollar, a process known as decimalization, squeezed profits for market makers and specialists that had overseen stock trades.

Faced with the need to maintain liquidity on electronic platforms where profits were too fleeting for humans to capture, exchanges encouraged computerized firms to post orders for investors to trade against. Co-location and customized data feeds developed alongside the hodgepodge of fees and rebates that market operators use to keep speed traders coming back.

“Part of what you’re seeing here is people not understanding it, because they either haven’t taken the time or haven’t dug in,” Larry Leibowitz, the former chief operating officer of NYSE Euronext, said in a March 25 conference call with analysts arranged by Sandler O’Neill & Partners LP. “It’s the responsibility of regulators to show leadership to show, ‘We looked at these issues, and we think these are fair. These are areas we want to improve and fine tune.’”

Old Days

Market-maker privileges have always been a hallmark of equity trading, starting with the sale of seats on the floors of exchanges. LaBranche & Co., created in January 1924, went public in August 1999. In papers prepared for its IPO, LaBranche disclosed that it regularly turned about 71% of sales into profit before paying its managing directors. Earnings before that expense climbed at least 25% every year from 1995 through 1999.

Results like those, as well as concern that NYSE and Nasdaq were too powerful, helped spur reforms since 2000 such as decimalization and a broader overhaul known as Regulation NMS that was aimed at lowering barriers to trading. Through rules mandating that any order for stock be routed to whoever in the country was transmitting the best offer to buy or sell, regulators hoped competition among a much larger pool of de facto market makers would lower costs for investors.

Lower Fees

That happened. Buying 1,000 shares of AT&T before 1975 would have cost $800 in commissions, Charles Schwab, who founded discount brokerage Charles Schwab Corp., told the U.S. Senate in February 2000. That’s roughly 100 times more than the fees paid by some retail stock-pickers today.

Federal regulators have asked for years whether new restrictions were needed. In February 2012, Daniel Hawke, the head of the SEC’s market-abuse unit, said the agency was examining practices such as co-location and rebates that exchanges pay to spur transactions. Last year, the CFTC announced a review of speed trading and sought industry input.

SEC Commissioner Daniel Gallagher said on March 28 that individuals are concerned that high-frequency traders detract from fairness in the marketplace.

“The problem with high-frequency trading right now is that there’s a perception that for the little guy, the markets aren’t fair,” Gallagher told CNBC during an interview. “That perception to me is a reality. It’s something we need to address.”

Bloomberg.com