June 16, 2010 / 10:12 PM / 9 years ago

UPDATE 3-US lobby group formed on high-frequency trade

* New lobby group has 24 firms, expects more to join

* Former SEC chief economist Overdahl to be spokesman (Recasts lead and headline, adds SEC inquiry into another former staffer joining a trading firm)

By Ann Saphir

CHICAGO, June 16 (Reuters) - The Futures Industry Association on Wednesday said it formed a new lobby group to represent high-frequency trading firms that have come under heightened scrutiny for trading practices that may have contributed to Wall Street’s May 6 “flash crash.”

The lobby, the Principal Traders Group (PTG), represents a who’s who of high-frequency traders, including Getco LLC and Allston Trading. It is chaired by Donald Wilson, who heads top Chicago futures trading firms DRW Trading. Most of the 24 member firms are based in Chicago.

The group’s formation is in response to “the demonization of speculation,” said FIA President John Damgard. FIA, which represents banks, exchanges and others in the futures industry, is the umbrella organization for the new lobby, but will not run it day to day.

High-frequency firms, which use rapid-fire algorithms to earn profits from market imbalances, have been under criticism over the past year for strategies some say unfairly take advantage of slower traders.

James Overdahl, the former chief economist at the Securities and Exchange Commission, was named as spokesman for the new lobby. He will remain vice president of National Economic Research Associates, where he has worked since leaving the SEC in March.

High-frequency firms were pushed further into the spotlight when some were blamed for exacerbating the Wall Street “flash crash” by pulling out of the markets.

Such finger-pointing is misplaced, Wilson told reporters on Wednesday.

“For a while there was a lot of discussion in the press about the potential harm that some of these market participants were doing to the markets,” Wilson said.

PTG hopes to make the case to lawmakers, regulators and the public that proprietary trading firms — those that trade with their own money in contrast to hedge funds or banks — do more good than harm. More firms are likely to join PTG in coming months, Wilson said.

“The truth is, the high-frequency traders create the liquidity so that people coming into the market have buyers on the other side,” FIA’s Damgard said. “Absent their presence in the market, we would see much wider spreads.”

The group is not exclusively composed of high-frequency traders, but many of its members use the strategy, Wilson said. The group’s formation comes at a critical time for independent trading firms.

U.S. lawmakers are hashing out a sweeping financial regulatory reform bill that would push over-the-counter derivatives into clearinghouses and possibly centralized trading venues — a move that could benefit trading firms by opening up an entirely new class of assets to them.

But proposals being considered by regulators could hurt the firms. The Commodity Futures Trading Commission (CFTC) has a plan to limit the number of futures contracts a trader can hold at one time, while the SEC is considering a plan to clamp down on some types of high-frequency trading and to impose trading halts in volatile markets.

OVERDAHL SAYS WILL NOT BE A LOBBYIST

verdahl takes the post after leaving his SEC job in March. Before joining the SEC in July 2007, he was chief economist at the CFTC, which regulates the futures industry.

Overdahl said he is abiding by SEC ethics rules and will not represent the group in a lobbying capacity.

“I am here to help improve public understanding of what happens in these markets,” he said.

“We want to make sure the information that gets out about the role of these players in the market is accurate and reflects the role that we believe they play in the markets in terms of providing liquidity and reducing volatility and lowering overall transaction costs.”

Some lawmakers have expressed concern over the number of high-level officials leaving regulatory agencies for the private sector, sometimes to the very firms their agencies oversee.

Last week, Getco — a Chicago-based trading group that is one of the biggest high-volume traders in U.S. equities — hired another former SEC staffer, Elizabeth King, to help navigate regulatory issues.

The SEC’s inspector general has opened an investigation into the move, according to a letter from the regulator’s internal watchdog to Senator Charles Grassley, who requested the inquiry.

The letter did not mention Overdahl. (Editing by Leslie Adler)

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