NEW YORK (Reuters) - About 25 high-frequency trading firms have discussed forming a lobbying group within the Futures Industry Association as they move to deal with growing scrutiny in Washington, the association told Reuters.
The firms have held a series of meetings in Chicago over the last two months, spurred by the prospect of a new transaction tax, commodity market position limits, and the possibility of a crackdown on high-frequency trading, the FIA said.
The group has a draft mission statement but no name, it said. It is unclear how many proprietary firms will ultimately join the group, which is expected to be formalized in January, according to the association.
"They will become an integral part of the FIA, and we will be aware of their issues," FIA President John Damgard said in an interview. "We will do everything we can to protect them from collateral damage from the administration" in Washington.
High-frequency traders use rapid-fire algorithms to earn thin profits from market imbalances. Critics say this leads to market manipulation and instability, but defenders say there is little evidence of this.
High-frequency trading accounts for about 40 percent of U.S. futures volume and about 60 percent of equities volume. It adds liquidity and has made trading cheaper and easier -- but more complicated -- over the last few years.
The FIA represents futures dealers, investors, exchanges and others. FIA directors Donald Wilson, chief executive of DRW Trading Group, and Chris Hehmeyer, CEO of Penson GHCO, are organizing the high-frequency trading firms.
The new group plans to meet on a quarterly basis and agree on five key issues it will ask the FIA to champion. A meeting is planned early next month.
"They want to make sure they have the opportunity to define themselves," Damgard said.
He cautioned that the new group and the FIA are not expected to agree on all issues. But he added, "In this particular legislative climate, many of the things that threaten individual firms threaten everyone."
Group members would pay an annual fee based on head count, and would need to be FIA members.
The FIA did not name the firms involved in the talks, which began in October. Four high-frequency trading firms separately told Reuters they were aware of the talks.
NO SHORTAGE OF POSSIBLE GRIPES
The FIA did not reveal the group's mission statement nor detail the topics it will focus on.
With financial markets in the midst of the biggest overhaul since the Great Depression, there is no shortage of options.
Several House Democrats have proposed a tax on financial transactions, including futures trading. Supporters say it would help ensure Wall Street pays for the government bailout it received. But critics say it would damage markets and drive those who provide liquidity out of business.
Meanwhile, the Commodity Futures Trading Commission is expected to clamp down on excessive speculation in energy trading by restricting the positions of big market players.
Elsewhere, the Securities and Exchange Commission plans to issue a paper on high-frequency trading in January. Chairman Mary Schapiro has said the SEC will propose rule changes if concerns are significant.
The independent proprietary firms have taken the brunt of high-frequency trading criticism, notably from Democratic Senator Ted Kaufman, who has aggressively pushed for a crackdown.
The FIA-related group is one of at least two organizing efforts by high-frequency trading firms, according to sources involved in earlier discussions.
The idea was first floated as early as a year ago. It gained traction over the summer as lawmakers and the public paid more attention to the trading practice, and as regulators started to investigate.
"There's a sense to which they like to work on things they understand well and can model in a quantitative way, if possible, and Washington is scaring them to death," said a source familiar with the discussions.
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