New High-Frequency Trading Group Works To Burnish Industry’s Image
The Modern Markets Initiative, a new trade group launched with the help of advisers from both the Romney and Obama presidential campaigns, hopes to change the narrative on an often-misunderstood field.
The Modern Markets Initiative, a new trade group launched with the help of advisers to the Romney and Obama presidential campaigns, hopes to change the narrative on an often-misunderstood field.
It only lasted a few minutes—from 2:42 p.m. to 3:07 p.m. ET on May 6, 2010, to be exact—but it has caused a big image problem for high-frequency traders ever since.
The severe drop in the stock market during that 25-minute period, dubbed a “flash crash,” has been a bit of a black eye for high-frequency traders, who use computerized models to take advantage of fleeting price shifts.
The industry’s solution? Start a new trade group.
Last week, two leading political strategists—one an adviser on Barack Obama’s two presidential campaigns and the other part of the team guiding Mitt Romney’s failed 2012 campaign—filed paperwork to launch the Modern Markets Initiative (MMI). The group says MMI “is focused on demonstrating the benefits of algorithmic or quantitative trading, often referred to as high-frequency trading, in today’s modern markets.”
More about the new group’s goals:
Scoping out a name change: According to The Wall Street Journal, the Modern Markets Initiative is hoping to push for a new name for what its members are and do—in part because of the bad reputation “high-frequency trading” currently has. “One of the things that has been a problem with the phrase high-frequency trading is that it has become a catch-all for anything people don’t like,” MMI spokesman Peter Nabicht told the newspaper. The association plans to encourage the public to call its members “automated professional traders” instead.
Making sense of a complex industry: Explaining to the general public what a automated professional trader does definitely isn’t the easiest thing in the world. But in launching its new website, MMI focuses heavily on introductions—such as its video (shown above) that explains the advantages of algorithmic trading in a simple way. In a blog post citing a Yahoo Finance article it says describes the process well, MMI notes that algorithmic trading has become common because of its high efficiency compared to other methods. “Yes, algorithms are prevalent in today’s marketplace, and used by most market participants, whether HFT [high-frequency traders] or not,” the post states. “Algorithms are used because of the efficiency and accuracy that they bring to getting investors the best possible price.”
Regulatory pushback: The trade group’s formation comes at a time when the industry faces increased regulatory pressure, according to the WSJ article. The Securities and Exchange Commission is pushing for a review of computerized markets due to their high complexity and potential for glitches. Meanwhile, the Financial Industry Regulatory Authority (FINRA), an nonprofit regulatory group, plans to prioritize abuse of high-frequency trading practices in 2014. “Although many HFT strategies are legitimate, some are not and may be used for manipulative purposes,” FINRA stated in a recent letter outlining its priorities for the year [PDF]. “Given the scale of the potential impact these practices may have, the surveillance of abusive algorithms remains a high priority for FINRA.”
MMI points out research that shows the benefits of algorithmic trading, including a 2009 Federal Reserve Board discussion paper [PDF] countering claims that high-frequency trading increases volatility. “If anything, the presence of more algorithmic trading is associated with lower volatility,” the report states.