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June 03, 2010

Facing regulation, High Frequency Traders get into the political game

By CREW Staff

High Frequency Traders complete trades in a fraction of a second using high speed computers, traders are often unaware of what stocks they’re buying and selling, because when you hold a share for a fraction of a second, what’s the point? These traders may only make fraction of a penny on each transaction, but when you’re making thousands of trades a second, those fractions add up quickly. By some estimates these transactions make up 40-70% of all trading on the domestic markets and since 2005, average daily trading volumes have increased by 164%. It is also part of the reason why Goldman Sachs was quickly making so much money after the financial meltdown.

Firms doing high frequency traders make up roughly 2% of nearly 20,000 trading firms operating in the U.S., but they may have an outsized influence on market stability. After the May 6th “Flash Crash”, which saw the markets tank and lose more than a trillion dollars in capital then quickly recover, regulators have begun to ask questions about the role that high frequency trading may have played in the episode. Sen. Edward Kaufman (D-Del.) asked the Security and Exchange Commission (SEC) to look at how high frequency traders operate. And the SEC was quick to investigate the crash, but has been unable to come up with a conclusive explanation. Nevertheless, it has proposed a new set of rules to prevent another such crash including a “circuit breaker” that would halt trading if trading shows signs of extreme volatility, such as a stock price moving more than 10% in a five minute period. The rules do not specify how individuals markets should slow volatile trading.

With regulation on the horizon some of the bigger players in the high frequency trading business have hired lobbying firm Patton Boggs to push their agenda on Capitol Hill. Patton Boggs filed paperwork on behalf of both Quantlab Financial and RGM Advisors on February 1, 2010, and will represent both companies in matters relating to “legislation and regulation affecting high speed computer trading.” So far both firms have respectively paid $40,000 in fees to Patton Boggs. Another firm, GetCo, has been represented by Rich Feuer Group since 2008. That firm specializes in lobbying on financial industry issues. According the Center for Responsive Politics, in 2009, Getco spent $300,000 in lobbying fees and has spent $90,000 so far in 2010.

In addition to the uptick in lobbying, these firms have also increased their political giving. GetCo is an especially big giver, having donated $129,841 to politicnas since 2005. Additionally, the company has recently formed its own political action committee and its has Since 2008, Quantlab has contributed $9,000, and RGM has given $28,400 since 2005. With increased attention and possible regulation it looks like we’ll see more political activity and lobbying from high frequency traders in the future.

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