WHEN: TODAY, FRIDAY, April 4, 2014
WHERE: CNBC'S "CLOSING BELL"
Following is the unofficial transcript of a CNBC interview with NY Attorney General Eric Schneiderman on CNBC's "Closing Bell" today. Following is a link to the video on CNBC.com: http://video.cnbc.com/gallery/?video=3000264583. All references must be sourced to CNBC.
KELLY EVANS: THAT'S RIGHT EAMON ERIC HOLDER ISN'T THE ONLY REGULATOR QUESTIONING IF HIGH FREQUENCY TRADING IS BEING USED IN AN ILLEGAL FASHION NEW YORK ATTORNEY GENERAL ERIC SCHNEIDERMAN IWS ALSO INVESTIGATING THE PRACTICE.
BILL GRIFFETH: HE HAS GONE ON RECORD SAYING THAT HIGH FREQUENCY TRADING IS INSIDER TRADING 2.0 AND HE JOINS US RIGHT NOW MR SCHNEIDERMAN ALWAYS GOOD TO SEE YOU THANK YOU FOR JOINING US.
SCHNEIDERMAN: GLAD TO BE HERE. THANK YOU.
GRIFFETH: DESCRIBE HOW YOU BELIEVE I MEAN THERE ARE THOSE WHO SAY THAT THIS IS NOTHING MORE THAN VERY SMART PEOPLE WITH A LOT OF MONEY WHO HAVE FIGURED OUT A WAY TO USE TECHNOLOGY TO REMOVE RISK FROM THE MARKET FOR THEIR BENEFIT. HOW IS THAT INSIDER TRADING?
SCHNEIDERMAN: WELL THE REASON WE CALL IT INSIDER TRADING 2.0 IS THAT THERE IS SOME ACTIVITY THAT PROBABLY DOES VIOLATE EXISTING LAWS AND THERE IS SOME ACTIVITY THAT DOESN'T FALL WITHIN THE TRADITIONAL CATEGORIES OF INSIDER TRADING THAT PROBABLY SHOULD BE MADE ILLEGAL. THE LAWS AND REGULATIONS HAVE TO BE UPDATED BUT I THINK THERE HAS BEEN A LOT OF HYPERBOLE IN RECENT WEEKS ABOUT THIS ISSUE. THERE ARE SOME FIRMS AND THERE ARE SOME EXCHANGES THAT ARE ESSENTUALLY CREATING A TWO-TIER SYSTEM OF INFORMATION FLOW SO THAT MOST PEOPLE ARE RELYING ON THE CONSOLIDATED FEED AND THAT'S LIKE THE SLOW LANE BUT EXCHANGES ARE THEN SELLING ACCESS TO DIRECT FEEDS TO CERTAIN COMPANIES SO THAT THEY CAN FRONTRUN THE MARKETS. THIS IS SOMETHING THAT HAS TO BE EVALUATED THERE MAY BE SOME VIOLATIONS OF EXISTING LAWS BUT THERE IS NO QUESTION IN MY MIND THAT WE HAVE TO TAKE ACTION TO PREVENT THERE FROM BEING A FAST LANE AND A SLOW LANE TO PUT SOME SPEED BUMPS IN THE WAY. THE TECHNOLOGY IS THERE TO FIX THE PROBLEM CAUSED BY THE EXPANDING AND ADVANCING TECHNOLOGY AND THE LACK OF REGULATION TO KEEP UP WITH IT.
EVANS: YOU HAVE BEEN LOOKING INTO THIS AT LEAST FOR A YEAR WHERE IS THE SEC ON ALL OF THIS?
SCHNEIDERMAN: I HAVE SPOKEN WITH THE SEC. OUR OFFICE AS YOU SAY HAVE STARTED LOOKING AT THIS OVER A YEAR AGO AND WE REACHED SOME EARLY AGREEMENTS THE SEC SENT OUT QUESTIONNAIRES AND THEY HAVE BEEN LOOKING INTO THE MATTER AND I THINK YOU SHOULD LOOK FOR THEM TO TAKE ACTION IN THE VERY NEAR FUTURE.
EVANS: WHAT KIND OF ACTION?
SCHNEIDERMAN: WELL THERE OBVIOUSLY HAS TO BE AN ADJUSTMENT TO REGULATIONS. THERE IS A VERY I MEAN WHEN WE STARTED LOOKING AT THIS A YEAR AGO NO ONE WAS TALKING ABOUT IT. I MEAN PEOPLE WERE COMPLAINING ABOUT IT BUT NO ONE WAS REALLY DOING ANYTHING. IN THE LAST FEW WEEKS EVERYBODY IS TALKING ABOUT IT AND THERE IS A VERY ROBUST CONVERSATION GOING ON NOT JUST COMPLAINING ABOUT THINGS BUT COMING UP WITH IDEAS AND PROPOSALS FOR SOLUTIONS.
EVANS: AND YOU HAVE RAISED A COUPLE OF THESE PROPOSALS FOR SOLUTIONS. THERE IS ONE A UNIVERSITY OF CHICAGO ECONOMIST HAS SUGGESTED WHICH INVOLVES FREQUENT BATCH AUCTIONS FOR THE STOCK MARKET INSTEAD OF CONTINUOUS TRADING IN YOUR ORDER OF PRIORITIES WHAT WOULD BE THE FIRST THING YOU WOULD DO HERE TO CORRECT SOME OF THE ABUSES THAT YOU SEE?
SCHNEIDERMAN: WELL I THINK THE MOST IMPORTANT THING IS TO ADDRESS THE ISSUE OF LATENCY ARBITRAGE SO ADDRESS THE ISSUE OF THE FAST LANE VERSUS THE SLOW LANE AND THAT CAN BE DONE BY EXCHANGES. AT THE VERY BEGINNING OF THIS WE STARTED WHEN WE LEARNED THOMSON REUTERS WAS GIVING A TWO SECOND EDGE TO SOME HIGH FREQUENCY TRADERS WHO WERE PAYING A LITTLE BIT MORE JUST FOR THE RELEASE OF THE SURVEY OF CONSUMER CONFIDENCE AND THERE ARE RULES AND LAWS THAT SAY ANALYSTS HAVE TO RELEASE INFORMATION TO ALL THEIR CUSTOMERS AT ONCE THEY CAN'T HAVE MULTIPLE TIERS THAT TWO SECOND EDGE 10 OR 15 YEARS AGO WOULD HAVE BEEN IRRELEVANT BUT IN THE UNIVERSE OF HIGH FREQUENCY TRADING THAT'S A LIFETIME. THEY CAN MOVE MARKETS
EVANS: WELL THAT'S AN EASY ONE TO CRACK DOWN ON BUT WHAT WOULD BE THE NEXT STEP?
SCHNEIDERMAN: SO THE QUESTION THEN IS IF YOU ARE PROVIDING INFORMATION YOU ARE AN EXCHANGE AND YOU ARE PROVIDING INFORMATION TO MOST OF YOUR CUSTOMERS THROUGH THE CONSOLIDATED FEED THROUGH THE SLOW LANE BUT YOU ARE CHARGING HIGH FREQUENCY TRADERS TO DIRECTLY CONNECT TO YOUR COMPUTERS SO THEY HAVE ACCESS TO THAT INFORMATION AHEAD OF TIME IT HAS THE SAME EQUIVOLENT EFFECT. THEY ESSENTIALLY ARE ABLE TO FRONTRUN THE MARKET TO KNOW WHAT THE PRICE IS GOING TO BE BEFORE PEOPLE ARE ABLE TO EXECUTE THEIR TRADES AND THAT'S AN ADVANTAGE WE DON'T WANT. THE MARKETS HAVE LOST A LOT OF CREDIBILITY AND I DON'T LIKE HEARING THAT PEOPLE DON'T TRUST THE MARKETS OUR MARKETS HAVE BEEN THE FAIREST MOST TRANSPARENT MARKETS IN THE WORLD IT IS A GREAT PRODUCT OF THE AMERICAN WAY OF DOING BUSINESS AND I THINK THIS IS AN AREA WHERE WE NEED TO RESTORE CONFIDENCE BUT I THINK ALL OF MY COLLEAGUES AND A LOT OF THE FOLKS THAT DO BUSINESS ON THE STREET ARE SPEAKING UP NOW ABOUT THEIR OWN CONCERNS. THEY HAVE BEEN VOICING TO ME AND TO MY OFFICE PRIVATELY FOR SOME TIME BUT NO ONE WANTED TO REALLY DO ANYTHING ABOUT IT AND NOW IT APPEARS WE ARE GOING TO GET SOME THINGS DONE.
GRIFFETH: AND A LOT OF THAT NOW IS OBVIOUSLY BECAUSE OF THE MICHAEL LEWIS BOOK AND THAT FAMOUS PHRASE THAT HE UTTERED EARLIER THIS WEEK THAT HE BELIEVES THE STOCK MARKET IS RIGGED. IT HAS BEEN GOING ON ALL WEEK NOW. OUR VIEWERS HAVE HEARD ME ASK THIS QUESTION REPEATEDLY THIS WEEK AND I AM GOING TO ASK YOU AS WELL. FIRST OF ALL DO YOU BELIEVE THAT THE STOCK MARKET IS RIGGED IN THAT CONTEXT AND NUMBER TWO MORE IMPORTANTLY FOR AVERAGE VIEWERS WATCHING OUT THERE WHO ARE INVESTORS IN THIS MARKET HAVE THEY IN YOUR VIEW BEEN HURT IN ANY WAY BY THE HIGH FREQUENCY TRADING WE HAVE BEEN TALKING ABOUT HERE?
SCHNEIDERMAN: SURE I MEAN FIRST OF ALL I RESPECT MICHAEL LEWIS HE IS TRYING TO SELL BOOKS HE IS GOING TO SELL A LOT BOOKS BUT I DON'T USE THAT KIND OF HYPERBOLE IS A GOOD WAY TO GET PEOPLES ATTENTION BUT IT DOESN'T HELP MOVE US FORWARD TO A SOLUTION. THERE IS A COST TO INVESTORS THERE ARE TWO ESSENTIAL PROBLEMS WITH THE CURRENT STRUCTURE OF HIGH FREQUENCY TRADING ONE IS BECAUSE OF THIS LATENCY ARBITRAGE THEY ARE ABLE TO SKIM THE MARKETS. THEY ARE TAKING A LITTLE BIT OF MONEY OUT NOW WE HAVE TO DISTINGUISH AND THIS IS VERY IMPORTANT THOSE OF US WHO REALLY WANT TO BELIEVE IN THE MARKETS AND WANT TO SOLVE THIS BETWEEN HIGH FREQUENCY ELECTRONIC TRADING WHICH IS A GOOD THING WHICH CREATES LIQUIDITY WHICH LOWERS THE SPREAD BETWEEN BID AND ASK WE ARE NEVER GOING TO GET RID OF THAT WE DON'T WANT TO GET RID OF THAT. AND FOLKS THAT ARE TRADING WITH INFORMATION THAT ALLOWS THEM TO FRONTRUN THE REST OF THE MARKET. THIS IS A GOOD FACTOR THE TECHNOLOGY IS GOOD CELEBRATE THE TECHNOLOBY BUT YOU KNOW WHEN WE INVENTED FASTER CARS WE ADDED IN SEATBELTS IT IS REALLY WHAT WE ARE TALKING ABOUT HERE AND I DO THINK THAT INVESTORS HAVE BEEN HURT BUT I ALSO THINK THAT THEY ARE NOW BEING PANICKED A LITTLE BIT WITH SOME OF THE RHEOTERIC THAT IS OUT THERE IT IS UP TO THOSE OF US WHO ENFORCE THE LAWS AND REGULATE THE MARKETS TO SOLVE THIS PROBLEM QUICKLY THERE ARE GREAT IDEAS OUT THERE AND AS I SAID YOU HAVE A LOT OF REGULAR BROKERAGE FIRMS AND OTHER FOLKS NOW SPEAKING SAYING OK WE ARE ONBOARD TO SOLVE THE PROBLEM. I THINK YOU ARE GOING TO SEE A LOT OF ACTION IN THE MONTHS AHEAD.
EVANS: JUST REAL QUICK THERE IS A SEPARATE ISSUE WITH SOME OF THOSE DISCOUNT BROKERAGE FIRMS IN PARTICULAR THAT'S PERCULATING RIGHT NOW AND THEIR SHARES HAVE BEEN HIT HARD ON THIS QUESTION ON THE EXTENT TO WHICH THEY ARE ABLE TO PAY FOR ORDER FLOW TAKING ADVANTAGE OF THAT TO BRING THEIR COST DOWN FOR LOT OF GENERAL CONSUMERS WHO ARE USING THESE PLATFORMS. DO YOU HAVE SPECIFIC CONCERNS ABOUT THE PRACTICES AT THE DISCOUNT BROKERS WITH RESPECT TO PAYMENT FOR ORDER FLOW?
SCHNEIDERMAN: WELL THAT IS A SEPARATE MATTER AND I CAN'T REALLY COMMENT ON IT BUT THE IDEA FOR THE MARKETS IS THAT THERE HAS TO BE LOOK WE EXPECT PEOPLE TO WORK AS HARD AS THEY CAN WE ARE NOT SAYING EVERYONE IS GOING TO BE EQUAL. YOU COULD DO BETTER RESEARCH THAN THE NEXT GUY. THE BASICS OF THE MARKET IT HAS TO BE A FAIR FORUM. IT HAS TO BE A FAIR PLATFORM. AND IF PEOPLE ARE GETTING AN ADVANTAGE OVER OTHER FOLKS THROUGH BY PAYING SOMEONE OFF THAT USUALLY REFLECTS A PROBLEM IN THE MARKET I MEAN THE HFTS ARE NOT GETTING DIRECT FEEDS TO THESE EXCHANGES FOR FREE THEY ARE PAYING AND WE THINK SOME OF THE EXCHANGES MAY BE MAKING AVAILABLE SPECIAL TECHNOLOGY EXTRA BROADBAND CLIPS AND HIGH FREQUENCY CIRCUITS TO ENABLE THEM TO TAKE FURTHER ADVANTAGE OF THIS. SO WE ARE LOOKING AT ANY UNFAIR ADVANTAGE AGAIN THE GOAL IS TO HAVE PEOPLE HAVE CONFIDENCE IN THE MARKET THAT IF YOU PLACE AN ORDER WITH YOUR BROKER YOU ARE NOT GOING TO BE IN A SLOW LANE WHEN SOMEONE ELSE IS IN THE FAST LANE THAT IS GOING TO DRIVE THE PRICE UP OR DRIVE THE PRICE DOWN AGAINST YOUR INTEREST.
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