August 15, 2022

Fast Traders, in Spotlight, Battle Rules

Now high-frequency trading firms, normally secretive, are stepping into the light to buff their image with regulators, the public and other investors.

After quietly growing to account for about 60 percent of the seven billion shares that change hands daily on United States stock markets, the firms are trying to stave off the regulators who are proposing to curb their activities.

To make their case, the firms have formed their first industry trade group, hired former Securities and Exchange Commission staff members and spent nearly $2 million in the last few years on Washington lobbying and contributions to lawmakers. Some even want to be called “automated trading professionals” rather than high-frequency traders.

“Once the spotlight was placed on them they looked at each other, and said, ‘Us, evil? Are you kidding?’ ” said James J. Angel, a finance professor at Georgetown University. “They are reacting in the same way as any threatened industry. They are stepping out of the shadows. They are trying to get their side of the story out.”

At stake is billions in profits for the high-frequency traders and investor confidence in the financial system.

Critics say traders with access to the fastest machines win at the expense of ordinary investors by seizing on the best deals and turning fast profits before other traders. They also say the lightning-fast trading strategies may be making financial markets less stable because the speed and volume of trades distort prices.

The traders say they have brought greater competition to the markets and have substantially cut trading fees for even the smallest investors.

“Central to our view is that our role and other firms’ role in the market is very constructive and very beneficial to investors,” said Richard Gorelick, chief executive of RGM Advisors, a high-frequency trading firm based in Austin, Tex., and one of the companies assuming a higher public profile.

Many firms remain hesitant to speak on the record. But one of the conditions for membership in the new industry group, called the Principal Traders Group, is that firms identify themselves publicly on its Web site.

The group comprises 31 firms. According to data calculated in June, its biggest members spent $690,000 on lobbying last year, more than double what they spent in 2009. They gave more than $547,000 to lawmakers’ political campaigns in 2010, on top of the $456,000 they handed out in the last political cycle in 2008.

High-frequency techniques are used by Wall Street banks and hedge funds, but it is the new independent firms that account for the bulk of this new kind of activity. Most of them were founded in the last 10 to 12 years. Many are still relatively small, employing a dozen to a hundred people, though some have as many as 250.

Trading mostly with their owners’ money, they scoop up hundreds or thousands of shares in one transaction, only to offload them less than a second later before buying more. They can move millions of shares around in minutes, earning a tenth of a penny off each share.

As a group, they earned $12.9 billion in profit in the last two years, according to the Tabb Group, a specialist on the markets. Tabb expects their earnings to slow this year as Wall Street’s big brokerage firms fight back with their own faster computerized trading.

The S.E.C. started to think these firms needed tighter controls in early 2009 when analysts for the first time began to point to the sector’s billions in profit, and critics wondered whether their technological firepower gave them an unfair advantage.

 The scrutiny intensified after the May 6, 2010, flash crash, one of the most abrupt market moves in recent history, when stocks plunged some 700 points in minutes before recovering.

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