High-Speed Traders Form Trade Group to Press Case
By Bradley Hope and Scott Patterson
Jan. 5, 2014 9:04 p.m. ET
High-frequency traders are going on defense.
To counter what they say is the industry's unfair reputation as a disruptive force in the markets, a group of high-frequency trading 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, 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, it plans to bolster a website Tuesday that will include a video arguing that high-frequency traders have made the financial markets cheaper and faster for investors, a blog to respond to critics and links to academic research.
Mr. Madden helped run Mitt Romney's 2012 presidential campaign, and Mr. Smith was a senior adviser to Barack Obama's 2008 and 2012 campaigns.
The move highlights how the upstart computer-driven trading firms, once a marginal, little-known segment on Wall Street, have grown into a mature industry looking to shift the perception of their activities.
High-frequency traders move rapidly in and out of stocks and commodities to capture fleeting shifts in prices. Their activities first drew broad scrutiny after the May 6, 2010, "flash crash," when many of the firms pulled out of stocks, a move some critics say helped worsen a sharp drop in the market.
High-frequency trading firms are responsible for about 50% of trading in the U.S. equities market, according to Rosenblatt Securities, which advises institutional investors on trading.
That number has been relatively stable over the past several years. However, during the second half of 2008 and first half of 2009, at the peak of the financial crisis, that number was closer to 66%, Rosenblatt said. High-frequency trading increases during times of heightened volatility.
An initial goal for the group is to create a new name for the industry. They prefer "automated professional traders" to high-frequency traders.
"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," said Peter Nabicht, spokesman for the new group. Mr. Nabicht is a former executive vice president of Chicago-based high-frequency firm Allston Trading LLC.
The industry is under increased scrutiny. The Financial Industry Regulatory Authority, in a letter last week outlining its enforcement priorities for 2014, said it plans to focus on high-frequency trading, known as called HFT. "Although many HFT strategies are legitimate, some are not and may be used for manipulative purposes," Finra said in the letter.
Several regulators, including some with the Securities and Exchange Commission, recently called for a broad review of computer-driven markets amid concerns that trading has become too complex and plagued by glitches. A 40 to 45 minute trading snafu in 2012 by Knight Capital Group that cost the firm nearly $500 million raised concerns that high-speed markets are vulnerable to mistakes that could spread to regular investors.
Not all high-frequency traders employ the same strategy, but they commonly use proprietary algorithms, state-of-the-art computers and ultrafast connections to exchanges. Critics say they take advantage of large institutions, such as mutual funds, by running up prices at lightning speeds once they detect a big buyer or seller in the market.
"There is no doubt that the computerization of Wall Street has been incredible, but there are a lot of problems that need to be investigated," said David Lauer, a former high-frequency trader who now consults on market structure.
High-frequency firms say 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.
"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 LLC, New York, one of the four founding firms of the new group.
The other founding firms are some of the oldest high-frequency traders in the industry: Tower Research Capital LLC and Hudson River Trading LLC, in New York, and Quantlab Financial LLC, in Houston. The 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.
—Andrew Ackerman and Brody Mullins contributed to this article.
http://online.wsj.com/news/articles/SB1000142...4887104579
By Bradley Hope and Scott Patterson
Jan. 5, 2014 9:04 p.m. ET
High-frequency traders are going on defense.
To counter what they say is the industry's unfair reputation as a disruptive force in the markets, a group of high-frequency trading 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, 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, it plans to bolster a website Tuesday that will include a video arguing that high-frequency traders have made the financial markets cheaper and faster for investors, a blog to respond to critics and links to academic research.
Mr. Madden helped run Mitt Romney's 2012 presidential campaign, and Mr. Smith was a senior adviser to Barack Obama's 2008 and 2012 campaigns.
The move highlights how the upstart computer-driven trading firms, once a marginal, little-known segment on Wall Street, have grown into a mature industry looking to shift the perception of their activities.
High-frequency traders move rapidly in and out of stocks and commodities to capture fleeting shifts in prices. Their activities first drew broad scrutiny after the May 6, 2010, "flash crash," when many of the firms pulled out of stocks, a move some critics say helped worsen a sharp drop in the market.
High-frequency trading firms are responsible for about 50% of trading in the U.S. equities market, according to Rosenblatt Securities, which advises institutional investors on trading.
That number has been relatively stable over the past several years. However, during the second half of 2008 and first half of 2009, at the peak of the financial crisis, that number was closer to 66%, Rosenblatt said. High-frequency trading increases during times of heightened volatility.
An initial goal for the group is to create a new name for the industry. They prefer "automated professional traders" to high-frequency traders.
"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," said Peter Nabicht, spokesman for the new group. Mr. Nabicht is a former executive vice president of Chicago-based high-frequency firm Allston Trading LLC.
The industry is under increased scrutiny. The Financial Industry Regulatory Authority, in a letter last week outlining its enforcement priorities for 2014, said it plans to focus on high-frequency trading, known as called HFT. "Although many HFT strategies are legitimate, some are not and may be used for manipulative purposes," Finra said in the letter.
Several regulators, including some with the Securities and Exchange Commission, recently called for a broad review of computer-driven markets amid concerns that trading has become too complex and plagued by glitches. A 40 to 45 minute trading snafu in 2012 by Knight Capital Group that cost the firm nearly $500 million raised concerns that high-speed markets are vulnerable to mistakes that could spread to regular investors.
Not all high-frequency traders employ the same strategy, but they commonly use proprietary algorithms, state-of-the-art computers and ultrafast connections to exchanges. Critics say they take advantage of large institutions, such as mutual funds, by running up prices at lightning speeds once they detect a big buyer or seller in the market.
"There is no doubt that the computerization of Wall Street has been incredible, but there are a lot of problems that need to be investigated," said David Lauer, a former high-frequency trader who now consults on market structure.
High-frequency firms say 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.
"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 LLC, New York, one of the four founding firms of the new group.
The other founding firms are some of the oldest high-frequency traders in the industry: Tower Research Capital LLC and Hudson River Trading LLC, in New York, and Quantlab Financial LLC, in Houston. The 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.
—Andrew Ackerman and Brody Mullins contributed to this article.
http://online.wsj.com/news/articles/SB1000142...4887104579
