Misha Malyshev to focus on quantitative hedge fund

Top high-frequency trader Teza to quit proprietary trading

• source: FT 10-Nov-16

One of the biggest and fastest traders in financial markets is abandoning its core business after its revenue engine stalled, a sign of the challenge of adapting in markets that unfurl in nanoseconds.

Teza Technologies of Chicago plans to exit its proprietary trading business in the next six months to focus on building up a quantitative hedge fund that manages more than $1bn, company executives said.

The new tack comes after net revenues at the proprietary business, which bets Teza’s own money in markets from futures to bonds, steadily declined from about $250m four years ago to $80m in 2015, according to three people familiar with the figures. In 2016, the business has struggled to make a profit, the people added.

“Generally, it is harder to make money,” Misha Malyshev, Teza chief executive, said in a rare interview.

Mr Malyshev founded Teza in 2009, naming it for a river in his native Russia. The high-frequency trading group used automated programs to vault to the top ranks of participants on venues such as the Chicago Mercantile Exchange and BrokerTec, a marketplace for US Treasury bonds once dominated by banks.

Mr Malyshev has a doctorate in astrophysics from Princeton. In 2008, he made more than $1bn for the hedge fund Citadel while serving as its head of high-frequency trading. Teza’s profile rose after it hired Sergey Aleynikov, a programmer who was convicted, and later exonerated, for stealing trading software codes from his former employer, Goldman Sachs. 

Teza’s situation reflects broader pressures within the industry, where increasing sums are spent on telecoms infrastructure, computer algorithms and exchange fees in order to be an instant faster than others. Chopper Trading, another HFT group, quit the arms race last year when it sold out to competitor DRW. 

The Teza payroll expanded from about 45 employees in 2013 to peak at 117 about a year ago. It has dropped to 93, Mr Malyshev said.

Teza in July began approaching investors with potential deals including purchasing equity in the core proprietary business, licensing its technology and becoming a partner in the fund business, three people familiar with the matter said.

Virtu Financial, a trading group based in New York, acquired wireless capacity and hardware from Teza in Europe and the US, including microwave towers that beam market information, people familiar with the matter said. Virtu declined to comment. 

Asked if Teza was trying to raise cash, Mr Malyshev said: “Capital is never bad.”

The hedge fund, Teza Capital Management, started managing outside money in October 2014 and contained $1.1bn as of February, according to a regulatory filing. “The future of Teza is the asset management business,” Mr Malyshev said.

The filing warned Teza Capital’s computer models could fall short, including by making “assumptions regarding the existence of relationships that appear to hold true or in fact held true in the past but that may not exist or hold true in the future”. 

Speaking a day after Donald Trump won his long-shot bid for the US presidency, Mr Malyshev added: “One thing we know is that in financial markets, six-sigma events are happening with the frequency of two-sigma or even one-sigma,” the lower numbers being statistically more likely.

Latour Trading unseats Goldman to become the number one player on the NYSE

Traders were left bemused last week when it emerged that a mystery trading firm had unseated Goldman Sachs to become the number one player on the New York Stock Exchange's closely watched program trading list during the last week of September.

Financial News has found that, at the same time as Latour Trading was rising up the NYSE list, another unknown trading company, Spire Europe, took the No. 2 spot on Nasdaq OMX's Nordic market for September.

We have also discovered that the similarity in the names of the two firms and the timing of their ascent is no coincidence.

According to NYSE's weekly report, Latour Trading was the most active firm on the list for the last week of September and the first week of October, trading some 484.6 million and 568.8 million shares respectively. The list, which breaks out principal trading, is used by market-watchers as a proxy for the most active proprietary trading desks. Proprietary traders are traditionally a secretive bunch due to the highly competitive nature of their strategies.

According to Nasdaq data, Spire was second only to Getco, the well-known Chicago-headquartered firm, among high-frequency players during the month by market share, and the 11th-largest provider of liquidity overall. It traded equities worth EUR3.6 billion.

According to filings with the U.K.'s Companies House and the U.S. Securities and Exchange Commission, both firms are wholly owned subsidiaries of Tower Research Capital, a New York-based hedge fund that specialises in high-frequency trading strategies. These firms typically use their own capital to trade large volumes across markets in a fraction of a second using sophisticated technology.

Tower Research Capital was founded in 1998 by Mark Gorton, who had worked in the proprietary trading division at Credit Suisse. The company hit the headlines last year during the trial of Societe Generale trader Samarth Agrawal who was convicted for stealing proprietary trading code from the French bank. Agrawal was leaving SocGen to join Tower Research.

According to SEC filings, Latour was founded in 2009 and is also active on the Chicago Board Options Exchange. The company, which occupies a floor of the same Broadway building as Tower Research, employs one person thought to be the company's chief executive, David Faucon. Faucon helped build the high-frequency trading desk at Societe Generale.

Spire was first established in 2006 but only began trading in 2009. According to sources familiar with the matter, Spire is active on Chi-X Europe, while public data shows it is also active on the London Stock Exchange , NYSE Euronext and the Swiss markets.

Scott Johnston, Tower's chief operating officer, confirmed that Latour and Spire are SEC and FSA-regulated subsidiaries respectively and added: "Latour is a member of most US equity exchanges and is a registered marketmaker on Nasdaq, Arca and Bats. Spire Europe is a member of, and marketmaker on, European equity exchanges and MTFs."

Sergey Aleynikov Gets 8 Years for Code Theft

A former Goldman Sachs computer programmer convicted of stealing source code from the firm was sentenced on Friday to more than eight years in prison, capping a case that had shone a rare spotlight on the world of lightning-fast computer-driven trading.

A federal jury in Manhattan in December found the programmer, Sergey Aleynikov, guilty of stealing proprietary code that places trades using computer algorithms that spot tiny discrepancies in stock prices. Such trading earned Goldman about $300 million in 2009.

Before leaving Goldman for a new job at a start-up, Teza Technologies, federal prosecutors had claimed, Mr. Aleynikov secreted the code onto a server in Germany to get around the investment bank’s security systems.

The prison term, while at the low end of federal sentencing guidelines, was four times what probation officials had recommended. Prosecutors had asked for as much as 10 years.

more at NYT

CME CEO defends high-frequency traders

(Reuters) — CME Group Inc. CEO Craig Donohue defended high-frequency traders on Wednesday, saying that, on the whole, they helped markets, but he acknowledged some of the more disruptive trading practices should be curbed.

The U.S. Securities and Exchange Commission said earlier this month it will take new steps to make markets more stable, focusing in on computer-driven trading that may contribute to big market swings.

High frequency traders are not "deleterious" to markets, Donohue said at a Bank of America Merrill Lynch financial services conference on Wednesday. As regulators learn more about how such traders operate, they will likely scale back plans to crack down and will ultimately propose only modest changes to current practices, Donohue forecast.

Donohue also said the giant exchange operator has an early lead in clearing over-the-counter derivatives, with $925 million in rate swaps already on CME's books since the Oct. 18 launch of its clearing service.

Congress recently passed Wall Street reform legislation that mandates clearing of most OTC derivatives, creating a potentially lucrative business that will be an important battleground for clearinghouses globally in coming years.

SEC Bans 'Naked Access'

WASHINGTON—The Securities and Exchange Commission voted on Wednesday to bar brokers from granting high-frequency traders unfiltered access to an exchange, a move aimed at imposing safeguards meant to prevent bad trades from disrupting the markets.

"Naked access" lets high-speed traders and others buy and sell stocks on exchanges using a broker's computer code without requiring them to filter through the broker's systems or undergo any pretrade checks.

Such trading arrangements have exploded with the growth of high-frequency trading firms, which rely on trading speed to make their money and don't want to be bogged down by a broker's controls. In some cases, brokers rely on assurances from traders that they have their own controls in place. Roughly 30% of market activity is currently conducted through naked access, said John Jacobs, director of operations at Lime Brokerage.

more at http://online.wsj.com/article/SB10001424052748703506904575592243789868142.html

Wall Street: The Speed Traders

Steve Kroft gets a rare look inside the secretive world of "high-frequency trading," a controversial technique the SEC is scrutinizing in which computers can make thousands of stock trades in less than a second

The piece gave a detailed account of the fact that most stock trades in the United States are no longer made by actual human traders. Most trades actually are placed by robot computers capable of buying and selling thousands of different securities in the time it took you to read this sentence.

The "60 Minutes" segment showed how supercomputers actually decide which stocks to buy and sell, based on the proprietary, and highly secretive, instructions programmed into them by Wall Street math wizards. The broadcast also showed how high-frequency trading played a distinct role in exacerbating the "flash crash" that took the Dow down some 600 points in about 15 minutes on May 6.

Read more: http://www.cbsnews.com/video/watch/?id=6945451n&tag=contentMain;contentAux#ixzz126c8UqU3

CBOE to launch second exchange later this month

(Reuters) — CBOE Holdings Inc., the biggest U.S. options market, will launch its planned second exchange targeted at high-frequency traders between Oct. 15 and Nov. 1, Vice Chairman Edward Tilly said on Tuesday.

The new electronic exchange, known as C2, will start by offering options on stocks that are also listed at the nation's eight other options exchanges, including sister market Chicago Board Options Exchange, Tilly said in an interview on the sidelines of a Futures Industry Association conference in New York.

Options on the Standard & Poor's 500 Index will be offered starting in the first quarter, he said. S&P 500 options currently only trade in face-to-face deals on the floor of the CBOE, and are the exchange's biggest revenue producing product.

Offering electronic trading of S&P 500 options could double or even triple current volumes, analysts have predicted, providing a large new revenue stream for the options exchange operator.

The new exchange may also boost CBOE's market share, which fell to 26.3 percent in October, behind rival NASDAQ OMX Group's venues. Year to date, CBOE remains the biggest U.S. options market.

Tilly did not offer any details on CBOE's pending share buyback, which is due to be offered to its former members by the middle of this month.

U.S. stock plunge raises alarm on algo trading

(Reuters) - A spine-chilling slide of nearly 1,000 points in the Dow Jones Industrial Average, its biggest intraday points drop ever, led to heightened calls for a crackdown on computer-driven high-frequency trading.

The slide, which in one 10-minute stretch knocked the index down nearly 700 points, may have been triggered by a trading error. Major stock indexes eventually recovered from their 9 percent drops to close down a little more than 3 percent.

But the follow-through selling that pushed stocks of some highly regarded companies into tailspins exacerbated concerns that regulators can quickly lose control of the markets in a world of algorithmic trading.

High-speed trading, which uses sophisticated computer algorithms based on specific scenarios to automate transactions at speeds in the millionths of a second, now accounts for about 60 percent of U.S. equity volume.

"The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today," Senator Edward Kaufman said in a statement.

"The battle of the algorithms -- not understood by nor even remotely transparent to the Securities and Exchange Commission -- simply must be carefully reviewed and placed within a meaningful regulatory framework soon."

Kaufman and Senator Mark Warner -- both Democrats -- said Congress needs to investigate the plunge, which at its deepest point wiped nearly $1 trillion off equity values.

And a House panel has slated a hearing on the causes for the market swoon for next Tuesday, with its chairman, Rep. Paul Kanjorski, urging the SEC to investigate as well.

The scary afternoon in markets came at a bad time for Wall Street, already reeling from accusations that it is a rigged casino -- a criticism stoked by recent civil fraud allegations against Goldman Sachs Group Inc (NYSE:GS - News).

The industry has been trying to stave off the Obama administration's calls for tough financial regulation, and the sell-off came as the Senate turned back a Republican effort to weaken a plan to set up a financial consumer watchdog.

SOME TRADES TO BE Canceled

Lending credence to the sense that the sell-off was exacerbated by technical errors, the Nasdaq stock exchange and NYSE-Arca said they would cancel certain trades that happened during the period in question.

But only trades in stocks that moved 60 percent up or down were covered by the cancellations, leaving some investors with potentially major losses on stocks such as Apple Inc (NasdaqGS:AAPL - News) and Procter & Gamble Co, which suffered lesser, but still significant, declines.

The U.S. Securities and Exchange Commission and Commodity Futures Trading Commission said they were reviewing the unusual activity and working with the exchanges to protect investors.

Citigroup Inc (NYSE:C - News) said it was investigating a rumor that one of its traders entered the trade, a spokesman for the bank said on Thursday. Citigroup, the third-largest U.S. bank, said it has no evidence that an erroneous trade has been made.

Several market participants cited speculation that a trader at Citigroup had erroneously placed an order for at least $16 billion in E-Mini contracts -- stock market index futures contracts that trade on the Chicago Mercantile Exchange's Globex trading platform.

But a source familiar with the situation said Citigroup had traded a total of just $9 billion of the E-Mini contracts, adding that that amounted to less than 3 percent of the $319 billion traded on the E-Mini on Thursday.

CME said the bank's trades in CME index futures appeared normal.

'SCREWED UP'

Earlier, sources told Reuters that the plunge in the Dow Jones Industrial average may have been caused by an erroneous trade entered by a person at a big Wall Street bank.

During the sell-off, Procter & Gamble shares plummeted nearly 37 percent to $39.37 at 2:47 p.m. ET (1847 GMT), prompting the company to investigate whether any erroneous trades had occurred. The shares are listed on the New York Stock Exchange, but the significantly lower share price was recorded on a different electronic trading venue.

"We don't know what caused it," said Procter & Gamble spokeswoman Jennifer Chelune. "We know that that was an electronic trade ... and we're looking into it with Nasdaq and the other major electronic exchanges."

A different P&G spokesman had said earlier the company contacted the Securities and Exchange Commission, but Chelune said that he spoke in error.

One NYSE employee leaving the Big Board's headquarters in lower Manhattan said the P&G share plunge lay at the center of whatever happened.

"I'll give you a tip," the employee said, speaking on condition of anonymity. "P&G. Check out the low sale of the day. Something screwed up with the system. It traded down $30 at one point."

A vicious market sell-off like Thursday's can be exacerbated when quickly sliding stock prices turn stop loss orders into market orders, meaning shares get sold at any price available.

WIDE SWINGS

NYSE Euronext (NYSE:NYX - News) said it was a safer place to trade than its electronic rivals -- who have been taking market share from it in recent years -- because it deliberately slowed down market making when it realized there was something extraordinary happening.

Triggered by unusual volatility in some stocks, NYSE brought in a "mini circuit-breaker" -- a liquidity refreshment point, or LRP -- to slow trading, which then jumped to other, fully electronic exchanges.

"It validates the decision to offer a hybrid market here where there's a human component married with the electronic," Louis Pastina, executive vice president of NYSE Operations told Reuters in an interview.

The NYSE's rivals advertise lower prices or faster transaction speeds.

The market plunge and especially wide swings in some individual stocks reignited some wider criticism of high-frequency trading, a strategy using lightning-fast computer programs to track market trends.

"We did not know what a stock was worth today, and that is a serious problem," said Joe Saluzzi of Themis Trading in New Jersey, a frequent critic of computer-driven high frequency trading.

Investors had already been on edge throughout the trading day after the European Central Bank did not discuss the outright purchase of European sovereign debt as some hoped they would to calm markets.

While the exchanges' move to cancel some of the most suspect trades may mollify some, there remained more questions than answers about the market's wild afternoon.

"The trouble is the exchanges aren't saying what caused the erroneous trade," said James Angel, a professor at Georgetown University's McDonough School of Business who specializes in market structure. "What they are saying is that it's not my fault, it was somebody else's fault."

High-Frequency Trading Faces EU Market Abuse Probe

(Bloomberg) -- High-frequency trading faces a European Union clampdown, as regulators investigate whether traders could use the practice to manipulate financial markets.

The European Commission, the EU’s executive arm, said it’s summoning hedge funds and banks “in the coming months” for fact-finding talks on the practice, as it considers stricter rules on market abuse due before the end of the year.

“We’re looking into high-frequency trading as part of the review of the Market Abuse Directive,” Chantal Hughes, a spokeswoman for Financial Services Commissioner Michel Barnier, said in an e-mail. “We want to make sure that the review captures technological developments.”

U.S. lawmakers have questioned whether the practice is benefiting Wall Street at the expense of individual investors. The Securities and Exchange Commission sought input from securities professionals on strategies used by high-frequency traders in January. EU officials met financial companies the same month to gather information.

High-frequency trading entails hedge funds and other firms using powerful computers to execute orders in milliseconds to profit from tiny discrepancies in the prices of shares.

“The high-frequency trading case is difficult because no- one is saying it does any harm,” Simon Gleeson, a regulatory specialist at Clifford Chance LLP, said in a telephone interview in London today. “No one has complained about it.”

Abusive Trading

The current Market Abuse Directive, which came into force in 2005, sets common rules across the 27-nation EU. The law requires firms to report suspected abusive trading to regulators.

“I will look at the Market Abuse Directive to extend its coverage,” Barnier said in a speech in London last month. “We cannot have different sanctions in case of non-application of the rules or abuse.”

Changes to the law would need to be approved by finance ministers and members of the European Parliament before entering into force.

The practice now accounts for 42 percent of the U.S. market, Celent, a consulting firm in Boston, said in a study in December. Proponents of the technique say it has lowered fees, boosted liquidity and increased volume. Firms such as Citadel Investment Group LLC, Getco Holding Co LLC, and Optiver Trading U.K. Ltd. operate high-frequency trading in Europe.

SEC to propose disclosure of high-frequency traders' activities

The Securities and Exchange Commission (SEC) is proposing that the identity of broker-dealers is revealed when high-frequency trades are made, insiders have said.

Two unnamed sources told the Financial Times that the SEC is concerned about the current way in which high-frequency trading, which seeks out pricing and other discrepancies in markets through the use of computer algorithms, takes place.

At the moment, the identity of broker-dealers carrying out such business is not shown up in audited trails – making it a difficult sector to regulate.

The new proposals would aim to improve this situation as part of wider reforms including the implementation of risk management controls.

John Nester, SEC spokesman, did not confirm the precise details of the regulators plans but said: "Staff expect to make a recommendation in the very near future."

Last month, the new Financial Rules Bill proposed that all large hedge funds – those with assets of more than $100 million – must be registered with the SEC.

SEC moves toward tracking high-frequency firms' trades

The Securities and Exchange Commission is conducting a cost-benefit analysis of tracking transactions of high-frequency trading firms. The agency is expected to move forward with the effort, sources said. The idea is to give each firm a unique identifier that would allow the SEC to monitor traders not registered as a broker-dealer or a market maker. "The SEC can get any data they want, period, but right now it's kind of cumbersome because they have to go through the clearing firm," said a securities lawyer. "This would make it more automated."

The agency is considering reporting requirements that would add transparency in the trading on so-called dark pools, private electronic platforms where large blocks of stock are traded anonymously.

The SEC also has proposed to ban "naked access" for high-speed traders, which allows firms to buy and sell stocks on exchanges using a broker's computer code without authorities knowing who is making the trades.

more at http://online.wsj.com/article/SB10001424052702303411604575167931084617758.html

Death Threats Against High-Frequency Trading Advocate Fade

Staunch proponent of high frequency trading Irene Aldridge says the e-mail death threats she received last August and September following a controversial TV interview have subsided.

“That was after my first interview with Saluzzi,” she said matter-of-factly in a phone interview late Thursday. Joseph Saluzzi , co-founder of broker Themis Trading, LLC, is a harsh critique of high frequency trading, arguing it rigs the markets.

The CNBC Power Lunch shouting match to which she refers took place on July 24, 2009 when she debated the merits of high frequency trading with Saluzzi.

“The retail and institutional investor is currently at disadvantage to this class of investor which represents 70 per cent of the volume. The equity market structure is corrupt. It needs to be fixed,” Saluzzi said.

“There is nothing new about high frequency trading,” Aldridge shot back. Her position is that high frequency trading, which relies on high speed transactions driven by sophisticated algorithms that find share price inefficiencies and anomalies, actually stabilizes markets and makes them more liquid.

She said she turned the e-mails over the police and FBI.

Either way, Aldridge, who is also a managing partner and quantitative portfolio manager at ABLE Alpha Trading, Ltd., is a lightening rod given her passionate defense of high frequency trading.

And to find her critics, one doesn’t have to go far beyond the comments on financial blogs like Zerohedge.com, for instance. Most are unprintable. That said, she has defenders, too.

“Don’t forget, Irene is merely the messenger….for very conflicted market participants who want nothing more than to perpetuate the current system,” Zerohedge.com Tyler Durden blogger wrote when she was getting the death threats. “Do remember: keep your messengers closer.”

How to Incubate High-Frequency Traders

Many traders in the flip-your-portfolio-as-fast-as-you-can set are seeking new homes in the wake of Wall Street disruptions, realignments, debates about bonuses and new, proposed rules from Washington, D.C., that could force large banks to shut down their proprietary trading divisions, which often engage in high-frequency trading.

"The last couple of years, we've seen massive dislocations in the financial markets. A lot of good people got laid off from banks and hedge funds and so, there is now a demand for incubators to help these guys get up, going and trading as quickly as possible," says Ram Rao, director of sales and business development at Trading Cross Connects (TXC), a Jersey City, NJ-based incubator that aims to work with high frequency trading teams.

Traders who seek out an incubator-type setup for their operations are also able to quickly create a performance record, points out Jayesh Punater, CEO of Gravitas Technology, an IT consulting company to many hedge funds. "Traders without a recognizable name or proven track record have a more difficult time raising capital," for their high frequency fund.

At TXC, the preferred profile indicates: You have been a high-frequency trader for two years or more; trade in foreign exchange, fixed income or listed derivatives; and have returns that consistently outweigh the risks of the trades being made-ideally, a Sharpe Ratio greater than 7.

If that's your experience, TXC wants to talk to you and help your trading team launch in two to three months or less.

It is one of several, startup incubators with offices in the three-state area surrounding New York City. Another startup incubator that targets high-frequency trading teams is New York-based Thesys Technologies, a division of Tradeworx, a hedge fund based in Red Bank, NJ that employs both middle- to high- frequency trading strategies.

A third and "somewhat new" incubator is Eze Castle Integration, a Boston-based provider of IT, technology and consulting services to more than 500 hedge funds. For the past three years, Eze Castle says it has also been incubating startup funds out of its midtown Manhattan offices and more recently, has started to provide technology, infrastructure and disaster recovery services to high-frequency trading firms.

All these organizations try to offer high-end trading technology to the startups, related services such as co-location and proximity services and in the cases of TXC and Thesys, working or seed capital. In contrast, office space, a trading platform, co-location of trading servers near the matching engines of trading venues are the focus of Eze Castle Integration's incubator services. Capital is not provided.

more at http://www.securitiesindustry.com/issues/22_3/-24638-1.html

SEC Vote Shows Scope of High-Frequency Trading Rules

High-frequency traders, whose lightning-fast stock and options tactics have been criticized by senators, are about to learn how far U.S. regulators may go to rein them in.

The Securities and Exchange Commission is poised to ask brokerage firms, traders and exchanges to weigh in on the practice, which describes a range of strategies that depend on high-speed executions, usually less than a millisecond.

SEC commissioners vote today on publishing a so-called concept release on high-frequency trading, dark pools and the structure of markets. The document will lay out the agency’s concerns and begin a process of soliciting and reviewing feedback that will last months before any rules are approved.

High-frequency trading accounts for as much as 70 percent of U.S. stock volume, according to data compiled by New York- based financial services consultant Tabb Group LLC. New regulations may make the practice less profitable for trading firms and hurt U.S. exchanges, where revenue hinges on the number of transactions executed.

The SEC is “going to put out some positions that the commission either feels strongly about or wants to feel people out on,” said Sean O’Malley, a former attorney in the agency’s division of trading and markets who’s now a partner at Goodwin Procter LLP in New York. “If you’re a compliant high-frequency trader, your concern is that there is this populist sentiment that these guys are getting away with something that is unfair to the rest of us.”

Wall Street Edge

The SEC is reviewing high-frequency trading after lawmakers including U.S. Senator Ted Kaufman, a Delaware Democrat, questioned whether the practice is benefiting Wall Street at the expense of individual investors. Proponents of the technique say it has lowered fees, boosted liquidity and increased volume.

Questions the SEC will ask include whether it should impose new rules on high-frequency trades, whether “highly automated, high-speed” trades hurt investors and what metrics regulators should use to determine the effects of new trading strategies on “long-term investors,” the agency said in a statement today.

The SEC will also ask about co-location, where traders and securities firms place computers close to exchange data centers to shave time off their orders. The agency wants to know whether co-location gives traders unfair advantages and whether firms that place computers near data centers should face regulations, according to the statement.

‘Big Laundry List’

It’s “a big laundry list of stuff they would like to hear opinions on,” said Justin Schack, director of market structure analysis at Rosenblatt Securities Inc. in New York. “It’s the beginning of a process that could ultimately result in new regulations, but it would be many months and possibly years before you’d see the end of that.”

Under pressure from U.S. Senator Charles Schumer, a New York Democrat, and Kaufman, the SEC in September proposed banning flash trades, or orders displayed for less than a second to a segment of a market center’s customers to get an execution at the industry’s best price on that venue. Schumer and Kaufman said the practice was giving an unfair edge to investors with the fastest computers.

Increasing Transparency

The SEC in October proposed rules to address concern that dark pools, private trading venues operated by brokers that don’t display prices, were growing too rapidly and drawing volume away from regulated exchanges.

SEC commissioners today will consider new rules for sponsored access, or arrangements by which brokers allow their customers to trade directly on exchanges and market centers. The practice gives some trading firms an edge in executing orders faster than competitors. The SEC is concerned that inadequate risk controls may lead to manipulation or trading errors that damage markets.

The SEC proposal would require brokers to implement “risk management controls” over their clients’ transactions before the trades are made, according to the agency’s statement. The controls must be “reasonably designed” to prevent orders that exceed “pre-set credit or capital thresholds,” the SEC said.

SEC Chairman Mary Schapiro said in October her staff is also working on a proposal to require that high-frequency traders give the agency “better baseline information.” The rule may attach identification codes to market participants who exceed a certain volume threshold so the SEC can monitor their trades, according to people familiar with the matter who declined to be identified before the proposal is public.

Lawrence Harris, a former SEC chief economist, said the agency should wait for market participants to respond to its concept release before pursuing piecemeal regulations.

“A concept release provides an opportunity for the expertise of practitioners and academics outside the SEC to be brought in on important questions before the agency,” said Harris, who’s now a business professor at the University of Southern California in Los Angeles. “At a time when the SEC’s technical competence has been found wanting, the use of outside expertise is particularly important.”

High-frequency firms organizing lobby group

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.

New comprehensive book on High-Frequency Trading

A hands-on guide to the fast and ever-changing world of high-frequency, algorithmic trading

Financial markets are undergoing rapid innovation due to the continuing proliferation of computer power and algorithms. These developments have created a new investment discipline called high-frequency trading.

This book covers all aspects of high-frequency trading, from the business case and formulation of ideas through the development of trading systems to application of capital and subsequent performance evaluation. It also includes numerous quantitative trading strategies, with market microstructure, event arbitrage, and deviations arbitrage discussed in great detail.

• Contains the tools and techniques needed for building a high-frequency trading system
• Details the post-trade analysis process, including key performance benchmarks and trade quality evaluation
• Written by well-known industry professional Irene Aldridge

Interest in high-frequency trading has exploded over the past year. This book has what you need to gain a better understanding of how it works and what it takes to apply this approach to your trading endeavors.

SEC Probing High - Frequency Strategies

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission will likely seek public input on so-called high-frequency trading strategies, and whether traders using them gain any special advantages by placing fast computers next to exchanges.

High-frequency trading, which accounts for some 60 percent of U.S. stock trades, involves using algorithms to buy and sell shares and earn tiny spreads on market inefficiencies. It has come under fire this year by those who claim it leads to manipulation and unstable markets, and the SEC is investigating.

According to a December 3 letter from SEC Chairman Mary Schapiro (above) to Senator Ted Kaufman, the regulator is also developing new initiatives in its ongoing review of stock markets, and hopes to seek public comment next month on high-frequency trading when it issues a paper on the issue.

The SEC "has been actively engaged in a vigorous and robust review of market structure," Schapiro said in the letter obtained by Reuters. "We will continue to use all tools at our disposal to aggressively pursue illegal market manipulation by high-frequency traders and others."

The regulator "will likely seek input on the various strategies used by high-frequency traders and any special trading advantages they may enjoy, including through co-location," Schapiro wrote.

In co-location, brokers and trading firms rent space next to exchanges' trading engines, allowing them to put their computers under the same roof and shave valuable microseconds from the time it takes to make a trade.

Kaufman is among the most vocal of critics of the lightening-fast trading strategies which markets heavily rely on for liquidity.

Schapiro's letter "takes everything (Schapiro) has said ... to the next level," Kaufman, a Democrat, said in an interview. "It's the sense of urgency."

The SEC, a big part of the Obama administration's financial reform plan, is trying to figure out what effect high-frequency trading has on long-term investors, and whether it makes markets more or less efficient, officials said last month.

The regulator also will include proposals to deal with so-called naked sponsored access, where brokers allow trading firms to use their license, giving them unfettered access to markets.

Proprietary firms, banks and hedge funds employ high-frequency strategies, which include statistical arbitrage.

The rush of criticism has frustrated such firms, whose high-frequency activity has made it cheaper and easier to trade in U.S. equities markets than in any other. Some investors have complained about manipulation of orders, but there is very little evidence of this.

There are some 50 U.S. stock trading venues, making oversight difficult for regulators.

Kaufman said the United States needs a surveillance system in order to gather trading data and ultimately decide whether manipulation is taking place. Only then can decisions on high-frequency trading be made, he told Reuters.

In the letter, which was a response to a November 20 letter from Kaufman, Schapiro said she is "committed to pursuing the goal of improved intermarket surveillance as a means to strengthen our markets, deter and ferret out wrongdoing, and augment public confidence."

SEC looks into effects of high-frequency trading

The Securities and Exchange Commission is looking into how high-frequency trading, which some estimate accounts for 50% or more of all equity trading in the U.S., affects markets, sources said. As lawmakers are scrutinizing the trading practice and other market developments, the SEC is not expected to publish a discussion paper on the strategies until December at the earliest. A congressional committee will discuss high-frequency trading, dark pools and other developments on Wednesday.

more at http://www.reuters.com/article/ousivMolt/idUSTRE59P56I20091026

Little-known Getco is key player in high-frequency trading

Getco LLC might not be a household name, but the private Chicago-based company with fewer than 250 employees is one of the largest players in high-frequency trading, often accounting for as much as 20% of daily trading volume of many stocks. Getco, which stands for Global Electronic Trading Co., has become one of the five largest traders when measured by volume in stocks and other electronically traded instruments. "They are probably the biggest market maker in the U.S. stock market," said Justin Schack, a vice president at Rosenblatt Securities.

All this has been profitable for Getco, which earned about $400 million in 2008, trading mostly with its own money, people familiar with its finances say.

more at

http://online.wsj.com/article/SB125133123046162191.html

and http://www.getcollc.com/index.php