In an interview this morning with Bloomberg Television’s Erik Schatzker and Stephanie Ruhle, New York Attorney General Eric Schneiderman said he agrees with Michael Lewis’s characterization that the stock market is rigged, “I probably would not be quite as hyperbolic as that. But we have started, actually over a year ago, looking at the use of information that didn’t fit into traditional categories of insider trading.”

Eric Schneiderman

Schneiderman also said it is not the Morgan Stanley (NYSE:MS)’s or the Goldman Sachs Group Inc (NYSE:GS)’s of the world that are at fault because they look for cracks in the system, ” There are some things here that may be illegal. There are some things that may now be legal that should be illegal or that the markets have to be changed. So part of what we’re doing here in addition to looking for illegality is shining a light on this area.”

Schneiderma: Market Race for Speed Inherently Dangerous

Attorney General Schneiderman on whether he agrees with Michael Lewis’s characterization that the stock market is rigged:

“Yeah I think I probably would not be quite as hyperbolic as that. But we have started, actually over a year ago, looking at the use of information that didn’t fit into traditional categories of insider trading. But because of the presence of these algorithmic, high frequency computers, they could use information that before was really useless. And we obtained a settlement with Thomson-Reuters was the best example because we learned that in addition to releasing this information to their customers at a particular time, they gave a two-second edge to a select group of higher paying customers which would have been irrelevant 10 or 15 years ago. But in the universe of High Frequency Trading and multiple exchanges that are interlinked, becomes a problem. They, to their credit, agreed to stop giving the two-second edge.”

“But we’re looking at whether there is any other illegality. High Frequency Trading of securities, good, produces liquidity. Front running the market bad… That’s why we’re conducting an investigation, we’re looking into [whether there is illegality].”

Schneiderman on whether the SEC is the ones at fault:

“No I think, I think that the game has gotten very complicated. The SEC is looking at this and I’ve been in touch with the SEC. Commissioners spoke up last week I think fairly forcefully about it. They need to make moves to change the regulatory structure. But look, we now have a situation with 60, more than 60 private and public exchanges that are interlinked. And there are cracks in that system. And the High Frequency Traders in this race for speed try to use the milliseconds of advantage they have over other traders, to front run markets and to take advantage of the cracks in the system.”

“The SEC’s got to look at some re-regulation in my view. But I think there are other things that can be done in the meantime. The idea of putting some speed bumps in and there are a variety of ways to do this, just to slow the process down or to take away the arms race, the need to take chances, for ever greater speed, could also could have a destabilizing effect.”

Schneiderman on whether the SEC looks more fair than it was 15 years ago when they were able to control bid asks:

“No I don’t think so. I mean I think that, I do think that it’s important to distinguish between High Frequency Trading which is a good thing. Extra liquidity compresses the bid ask, range… And the fact that there are those folks who are trying to take advantage of things to front run the system. If you can get information, and Michael Lewis talks about this, that someone’s dumping a lot of, I think he used Microsoft as an example. And you have the ability to know that just a few seconds before people can execute the trades, not even seconds, milliseconds. The other piece of this that we have to look it is the race for speed is inherently dangerous. Because that leads people to take more and more chances to try and get an advantage. And that could lead to destabilization of the market.”

Schneiderman on whether Lewis’s comments that from what he can tell it’s legal:

“Well I think he’s probably referring to federal law; we have a different securities law here. We’re looking at it. We’re not prejudging the situation. But I think your point on regulation is a little bit off. We tend in New York to be a little bit market-centric and finance-centric. We celebrate technology. But we have speed limits and airbags. I mean we celebrate technology but we have systems so that you can cancel your credit card if it’s stolen. So there are ways to have checks and balances. And what is being proposed is in the way of speed bumps and this is something, a new conversation, I support this idea of frequent batch auctions. So you would have all the trades that are up for one second or one half second, and then it’s allocated by price, not who got in a few milliseconds before the other at a lower price. That’s one way to do it.

“There’s another way that this new exchange that was featured in the “60 Minutes” program. IEX. They have their own way of putting in a speed bump. This is a conversation that’s just beginning but I think it’s very important. Both to prevent front running and to insure that the markets are safe. Look the problem here is, and I’m a fan of the markets, but I think Michael is right; we’ve lost a lot of credibility. A lot of investors do not have confidence in the markets and it’s up to those of us who believe in them, who enforce the law and regulate them, to restore that confidence.”

Schneiderman on whether regulators have lost credibility?

“No I don’t, I hope not. That’s certainly not our intention. These are changes in the structure. I have been in touch with the SEC they’re taking a hard look at it. And there are other regulators out there. But let’s keep in mind that there is a lot that can be done by exchanges themselves that should be done.  I mean we’re looking at issues of co-location, whether exchanges for example are selling at a high price extra bandwidth, high speed switches, that create just a little tiny bit of an extra advantage for some traders. This is an area that we have to all look at. Exchanges bear some responsibility, the firms that are using these computers bear responsibility. I’m going to see if anything illegal is begin done under New York Securities Laws and I’m sure my federal counterparts will be engaged as well.”

Schneiderman on why he is using the Martin Act to bring this investigation:

“Well because I’m the New York State Attorney General, I enforce state law. This is, we have a federalist system and there are states and state laws. And we have a securities act here that predates the federal securities laws. It goes back to the 1920s and it is broader in some respects than

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