Ex-SEC official joining trading firm lobby group

CHICAGO (Reuters) - James Overdahl, former chief economist at the Securities Exchange Commission, will act as spokesman of a new lobbying group representing high-frequency trading firms in Washington, the Futures Industry Association (FIA) said on Wednesday.

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 came in response to “the demonization of speculation,” said FIA president John Damgard. The group, 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 criticized over the past year for strategies some say unfairly take advantage of slower traders.

The firms were pushed further into the spotlight in May, 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. “There was really not an organized group to respond to a lot of these misstatements.”

PTG hopes to fill the gap, making 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 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 will 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 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.

Last week, Getco hired another former SEC staffer, Elizabeth King, to help navigate regulatory issues.

Some lawmakers have expressed concern over the number of high-level officials leaving regulatory agencies for the private sector.

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,” said Overdahl, who will remain as vice president of National Economic Research Associates, where he has worked since March.

“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,” he said.

The group does not plan to have its own lobbyist, although the FIA has a lobbyist as do some PTG members, Wilson said.

Reporting by Ann Saphir; editing by Jeffrey Benkoe