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.

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Trading in the shares of Citigroup, one of the most heavily traded stocks in the United States, was paused for five minutes at 1:03 p.m. after an over-the-counter trade of about 8,821 shares was posted at a price of $3.3174, or 12.7 percent lower than the $3.80 price of the previous trade.

The trade was later canceled, according to Nancy A Condon, a spokeswoman for the Financial Industry Regulatory Authority, which regulates brokerage firms. Even so, Citigroup shares closed 5 percent lower for the day, at $3.79.

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“It’s self-learning,” Kang says. “The numbers keep updating, the strategy keeps adjusting itself. It gets smarter.”

And it makes a lot of money. Algorithms like Dagger can exploit the smallest inefficiencies in the market. They can parse trades in millionths of a second. Some species can detect other algos embarking on predictable trading strategies, and ruthlessly adjust their techniques. They’re growing ever more complex, subtle, and sophisticated. And as they become more popular, they’re creating some serious headaches for regulators.

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I’d prefer that regulators look into whether a firm like Goldman Sachs (GS) unfairly view [sic] order and information flow ahead of its customers and clients.

we are pleasantly surprised… Yet when you follow up by saying:

But the press won’t touch that topic

we are totally ecstatic that you do not lump us into the definition of that derogatory word. Then again, feel free to do a search for “Goldman Sachs” here. Even an erudite portfolio manager such as yourself may learn a thing or two.

High-Frequency Distraction

By Ron Insana

Portfolio Manager

7/27/2009 11:40 AM EDT

The New York Times and The Wall Street Journal are taking aim at a new form of computerized trading known as “High Frequency” trading. The algorithm-based trading is allegedly an illegal form of front-running, as high-frequency traders hook into exchange computers and use “flash trades” to suss out incoming order flow and use the lightning speed of their own programs to jump ahead of customer orders. Critics argue that individual investors are at a distinct disadvantage for this reason and a variety of others. The proximity of high-frequency computers, which can be placed next to exchange computers for a fee, allows for an almost-osmotic transfer of information. Senator Charles Schumer (D, N.Y.) is asking the SEC to ban “flash trades,” which are phony orders placed by high-frequency programs that aim to fool market participants into entering orders. The programs jump in front of customer orders and gain a trading advantage. If that is indeed what is happening, it qualifies as “front-running,” an illegal practice on Wall Street. If high-frequency traders are just faster than everyone else and not illegally jumping in front of others or paying off the exchanges to get preferential trading treatment, then this new area of technology-based trading is no less legitimate than the use of the telegraph, the telephone, the ticker, computers, handheld devices or older-style “black box” or “dark pool” programs that give sophisticated traders the ability to simply trade faster. I’d prefer that regulators look into whether a firm like Goldman Sachs (GS) — whose former executives continue to run the New York Stock Exchange (NYX) ; advised on the merger between NYSE and Archipelago, and formerly owned a portion of the combined entity; own Speer, Leeds & Kellogg, the largest specialist firm on the Big Board floor; and control the greatest number of seats in the equity markets — unfairly view order and information flow ahead of its customers and clients. I am far more concerned about that than I am about the emergence of “high-frequency” trading. But the press won’t touch that topic. It’s easier to go after the dreaded speculators and dark pool traders than lose access to the most profitable and prestigious firm on Wall Street.

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From the appended Schumer piece on Bloomberg:

“Goldman Sachs believes high-frequency trading should have an accompanying obligation to provide liquidity, and be subject to appropriate regulatory oversight,” Canaday said.

Ed, we have been giving you the chance to provide your side of the story for months. Please take us up on the offer.

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