Published May 13, 2013
WASHINGTON – High-frequency trading firms increased their campaign contributions to federal lawmakers by 673 percent from the 2008 to the 2012 election cycle, according to a report that sheds light on their political connections in Washington and efforts to impact policymaking.
The report by the Washington-based nonprofit watchdog Citizens for Responsibility and Ethics in Washington (CREW) comes as U.S. financial market regulators mull whether new rules should be adopted to rein in high-speed traders, whom some critics accuse of harming smaller investors.
It compiles the campaign and lobbying records for 48 different firms like Citadel Investments, Getco, Knight Capital , Virtu Financial LLC and Tradeworx which engage in high-speed trading, a strategy that uses lightning-fast computers to search for ways to take advantage of tiny price moves in the marketplace.
It also identifies lawmakers who raked in the most campaign dollars over the course of three election cycles from high-frequency traders, with some of the biggest recipients from New York and Illinois, home to the country's two largest financial hubs.
The increases in campaign and lobbying spending marks a shift from just a few short years ago, when high-speed traders still were not well-known to the public and did not have much of a presence on Capitol Hill.
The Futures Industry Association sought to change that in 2010 with the creation of the FIA Principal Traders Group, a trade association representing the interests of high-speed firms.
The biggest event that got Washington more focused on high-speed trading was the May 6, 2010 "flash crash," in which the Dow plunged roughly 700 points before sharply rebounding.
In the aftermath of the "flash crash," regulators determined the plunge was not due to high-speed traders. The way those firms behaved during the event itself, however, helped spark a dialogue about whether new regulations were needed for high-speed trading firms.
High-frequency traders have generally argued against many of the proposed regulations that have been publicly debated, such as charging them for generating excessive message traffic or taking steps to forcibly slow the trading down.
Proponents of the practice say it brings much-needed liquidity to the market.
Melanie Sloan, the executive director of CREW, said the report published on Monday, titled "Rise of the Machines," demonstrates a typical Washington trend.
"An industry that is not a big player in Washington suddenly sees potential regulatory action coming down the pipe, and low and behold, it starts to make campaign contributions and having lobbying expenditures," she said. "That is what we see here with the huge increases."
CREW's report does not draw any conclusions about what impact the ramp up in campaign and lobbying spending has had over the past five years.
U.S. regulators have still not taken any steps toward imposing new regulations on the firms, despite a string of high-profile market events over the past few years.
The U.S. Securities and Exchange Commission has said it is still collecting data on high-speed trading activities to help it formulate its policy views.
Last year, regulators shifted gears to focus more on how to keep technology errors from spiraling out of control after a glitch at Knight Capital led to a $440 million trading loss and nearly toppled the firm.
The Commodity Futures Trading Commission is expected sometime in the coming months to issue a broad release asking a series of questions about high-speed trading and whether new rules are needed.
CREW's report found that since 2008 - the height of the financial crisis - the firms included in the study collectively spent $10 million to lobby Congress, the SEC and the CFTC.
Much of that spending occurred between 2009-2010, the period that includes both the "flash crash" and the time frame in which the Dodd-Frank Wall Street reform law was debated, drafted and enacted.
For campaign contributions, the firms collectively went from spending just $2.1 million in the 2008 cycle, to $16.1 million in the 2012 cycle - a 673 percent increase.
The biggest single donor over the three election cycles reviewed, CREW said, was Renaissance Technologies - a New York-based hedge fund.
While the hedge fund is not considered a high-speed trading firm, CREW said it included the fund in its report because it is known to deploy some "high-frequency strategies."
Over the three election cycles reviewed, it gave $13.8 million in donations, CREW said.
A second high-speed trading firm, Quantab Financial, also ramped up its giving considerably.
The Texas-based firm, which employs Patton Boggs as one of its top lobbying shops, increased its campaign contributions from just $8,300 in the 2008 cycle to more than $1.1 million in the 2012 cycle, the report says.
It is not a shock that many of the recipients of the big high-speed trading bucks come from New York, home to Wall Street, or Illinois- the home to the CME Group and the Chicago Board Options Exchange .
Perhaps what is more surprising is that the largest single recipient of donations from high-speed trading is Illinois Republican Senator Mark Kirk.
While Kirk does hail from a state that is home to the CME Group and sits on the Senate Banking Committee in charge of overseeing the issue, he has publicly said very little if anything on the topic of high-speed trading compared with some of his other Senate colleagues.
By contrast, the lawmaker who has received the second-largest chunk of change from high-speed trading firms - New York Democratic Senator Charles Schumer - has been very vocal.
On several different occasions, Schumer has pushed for more regulation of high-speed firms, including a proposal that would force them to take on "market maker" obligations so they could not pull out of markets during a crisis the way they did in the flash crash.
The report by CREW can be found here: www.citizensforethics.org/hftraders
(Reporting by Sarah N. Lynch; editing by Andrew Hay)