Split-second traders aim to polish image

High-frequency trading firms are forming a trade group in an effort to hold off regulators who want to curb their activities. High-frequency trading firms are forming a trade group in an effort to hold off regulators who want to curb their activities. (Seth Wenig/Associates Press/File)
By Graham Bowley
New York Times / July 18, 2011

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NEW YORK - For years they have operated in the shadows, often far from Wall Street, trading stocks at warp speed and reaping billions while criticism rose that they were damaging markets and hurting ordinary investors.

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 7 billion shares that change hands daily on US 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 are 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 in Austin, Texas, and one of the companies taking a higher public profile.

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

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 past 10 to 12 years. Many are still relatively small, employing a dozen to 100 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 10th of a penny from each share.

As a group, they earned $12.9 billion in profit in the last two years, according to TABB Group, a specialist on the markets.

The SEC 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.

Regulators did not blame high-frequency traders for causing the sell-off. But some firms may have exacerbated the decline by switching off their machines and withdrawing from the market. As the number of buyers dropped drastically, so too did stock prices.

“High-frequency traders turned what was a very down day for many investors into a very profitable one for themselves,’’ said Mary Schapiro, the SEC’s chairwoman.

The SEC has already put in place circuit breakers to prevent another flash crash. It has also proposed a rule that would force traders to report large trades.

The SEC and the Commodity Futures Trading Commission are seeking comments on other proposals to curb high-frequency trading. Final rules may not be introduced until 2012 or later. Many restrictions are being considered, including limits on the number of orders firms can make each second, and a minimum time for orders to stand.

The firms say many of the proposals are not needed. They portray their business as being in the vanguard of stock-exchange modernization.