It certainly isn't hard to sniff packets on a local network. From what I understand, these program traders sit right on the network backbones of the exchanges, which would make it possible, even likely, that somebody would do it. It would be irresistible.

It's also fairly easily preventible. If there are legitimate reasons for these machines to need/use microsecond latencies in their transactions, then each machine housing a trader program could be connected to the exchange on its own, private, non-routable network; i.e. one that only includes the exchange computer and the trader computer. Schematically, it would look like a pinwheel, with the exchange machine in the middle and the trader machines on the ends of the spokes. If they're not on the same network, they couldn't 'sniff' the network packets off of the other machines. If a guy like me can figure that out, I'm sure it could be figured out by the IT guys at the exchange. So...

The real question is: why are these trader machines allowed such access?