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Exclusive - New York attorney general eyes exchanges in high frequency probe: sources

New York Attorney General Eric Schneiderman speaks to reporters during the New Eastcoast Arms Collectors Associates Arms Fair at the Saratog
New York Attorney General Eric Schneiderman speaks to reporters during the New Eastcoast Arms Collectors Associates Arms Fair at the Saratog

By Karen Freifeld and Nadia Damouni

NEW YORK (Reuters) - The New York Attorney General's office is seeking information from exchanges and alternative trading platforms about their relationships with high frequency trading firms, as part of its probe into allegedly unfair trading practices on Wall Street, according to sources familiar with the situation.

Attorney General Eric Schneiderman's office is expected to send subpoenas within days to exchanges, one of the sources said on Thursday. The subpoenas will likely focus on how high frequency traders may receive information before other market participants.

Another source said major banks that operate dark pools, or platforms where trades take place out of sight of the rest of the market, have been sent letters asking for information.

The sources spoke this week on condition of anonymity because they were not authorized to discuss the matter publicly.

The major U.S. exchange operators include IntercontinentalExchange Group , Nasdaq OMX Group Inc and BATS Global Markets.

NYSE, a unit of ICE, has already been cooperating with the attorney general by sharing data, while BATS has also had conversations with the prosecutor, two of the sources said. Nasdaq Chief Executive Robert Greifeld said in an interview on April 24 that his company had not been subpoenaed.

Exchange operators and Schneiderman's office declined to comment.

The expected move by Schneiderman's office shows how investigations into the practices of high-frequency trading firms are broadening. The U.S. Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Bureau of Investigation have also said they had several active probes into high-speed and automated trading.

The probes have been going on for several months to a year but scrutiny has intensified in recent weeks following the release of best-selling author Michael Lewis' new book, "Flash Boys: A Wall Street Revolt." In the book, Lewis contends that high-frequency traders have rigged the stock market, profiting from speeds unavailable to others.

Virtu Financial, one of the largest high-frequency market-making firms, recently delayed the launch of its initial public offering as focus of the industry had grown.

Separately, the NYSE said on Thursday it would pay $4.5 million to the U.S. Securities and Exchange Commission to settle charges that it violated regulations, including around co-location practices.

Schneiderman has been looking into what he considers unfair Wall Street practices for about a year and has spoken out against issues such as exchanges allowing high-frequency trading firms to "co-locate" their computers within the exchanges' data centers so that trading information reaches them faster than others.

At least half-a-dozen high-frequency trading firms, including Tower Research Capital LLC, Chopper Trading LLC and Jump Trading LLC, were sent subpoenas two weeks ago, Reuters has previously reported.

One of the sources said the earlier subpoenas requested information about business operations, including their strategies, the technology they use, and any communications - such as e-mails, writings, notes, text messages and even social media posts - the firms had with the exchanges.

The information requested is so broad that some of the firms have asked that the scope be narrowed, the source added.

(Additional reporting by John McCrank and Herbert Lash; editing by Paritosh Bansal and Richard Chang)

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