High frequency traders aren’t going gently into that goodnight. After tolerating criticism and the threat of tighter regulations in response to their role – real or implied – in the modern equity market structure, representatives from four high-speed trading firms are coming out swinging and have formed their own trade group to make their collective voice heard.
To counter what they said is the industry’s unfair perception as a disruptive force in the markets, the Wall Street Journal reported today that a quartet of HFT firms have hired a pair of heavy-hitting political strategists and formed a trade group to press their case with regulators and lawmakers. The strategists hail from the recent presidential campaigns of Mitt Romney and President Barack Obama.
The Journal reported that the HFT strategists, Kevin Madden and Erik Smith, last week submitted paperwork to found a group called the Modern Markets Initiative, with headquarters in Washington, D.C. Backed by four high-speed firms – Global Trading Systems, Tower Research Capital, Hudson River Trading of New York, and Quantlab Financial of Houston – the new group plans to unveil a website Tuesday, January 7 that will include a video arguing that HFTs have made the financial markets cheaper and faster for investors. The site will also include a blog to respond to critics and links to academic research.
High-frequency traders, who have to date, been content to endure criticism from many market participants that they are a disruptive force in the marketplace. Many buysiders argue that HFT strategies, using hyper-fast computers and very small trades, hamper the execution of their larger orders at the best market price or in large block trades or front-running.
HFT firms counter that they have reduced the cost of trading for all investors and made the markets more efficient. The new group plans to spread that message more widely.
HFTs first attracted the public and government eye back in May of 2010. After the May 6 “Flash Crash” many believed it was these speedy traders who helped exacerbate the market’s whipsaw pricing movement and increase the severity of the crash by leaving the marketplace – thus causing liquidity in many stocks to dry up instantly. Critics also point to the use of hyper-fast computers and proprietary algorithms and models in the wake of more recent events such as Knight Capital trading snafu in 2012 that cost the firm nearly $500 million.
According to Rosenblatt Securities, HFT firms constitute approximately 50 percent of trading in the U.S. equities market. This is down from its highest levels of 66 percent seen back in 2008 and 2009.
A New Year, A New Name
An initial goal for the new HFT trade group is to create a new name for the industry. They prefer “automated professional traders” to high-frequency traders, the Journal reported.
“One of the things that has been a problem with the phrase high-frequency trading is that it has become a catch-all for anything people don’t like,” Peter Nabicht, spokesman for the new group, told the Wall Street Journal. Nabicht is a former executive vice president of Chicago-based high-frequency firm Allston Trading.
The Financial Industry Regulatory Authority, in a letter last week outlining its enforcement priorities for 2014, said it plans to focus on HFT. “Although many HFT strategies are legitimate, some are not and may be used for manipulative purposes,” Finra said in the letter.
“There are a lot of noisy opponents of high-frequency trading, but there hasn’t been an organized rebuttal, and that is going to change,” said Ari Rubenstein, managing partner of Global Trading Systems, one of the four founding firms of the new group.
There is an active debate in the US among regulators and academics about the effects of HFT on the retail investor, Robert Stowsky, senior analyst for Aite Group, told Traders. “The question of fair and equal access to not only the markets themselves, but data and news feeds are getting the attention of legislators. Last year saw then Representative Ed Markey of Massachusetts calling HFT a clear and present danger to the stability and safety of our markets in a letter asking the SEC to reign in HFT trading,” said Stowsky.
“Representative Markey is now Senator Markey and presumably will continue pursuing his efforts in this area. HFT firms are feeling the pressure to present to both the public and Congress an alternative view of their activities,” said Stowsky.
The Securities Traders Association sees the reason for the newly minted HFT group. As Jim Toes, president and CEO of the STA, told Traders Magazine, “I am encouraged by this group organizing in this fashion. It is a plus for our industry and I applaud the efforts of these four firms. With regards to HFT firms, I believe they have come to realize that existing in a state of seclusion is not good for their business model, or our industry. In our industry, if you do not tell your story, others will tell it for you. I think this group needs to have its own advocate to confront false and misleading accusations, however, I do hope that this group will allocate a portion of its resources in helping identify “good” HFT and “bad” HFT practices. Doing so, will help it build credibility within the industry.”
The new HFT trade group is seeking additional members. The initiative won’t be the first to push high-speed traders’ agenda. In 2010, about 30 high-speed firms formed the Principal Traders Group, part of the Futures Industry Association trade group, to help shape policy in Washington.
Modern Markets Initiative has already started reaching out to lawmakers, sending a two-page introduction to the group around the Capitol and an email address for contacting its leadership.
Cameron Smith, founder of Quantlab and a former SEC attorney, kicked off the Modern Markets Initiative in August with a basic website, modernmarketsinitiative.org.
