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 hurt 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 small 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 simpler — 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 question the FIA to champion. A meeting is plotted 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 started 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 largest overhaul since the Fantastic 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 hurt 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 huge 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 thought 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 know well and can model in a quantitative way, if possible, and Washington is scaring them to death,” said a source familiar with the discussions.

High-frequency firms organizing lobby group is a post from: Before You Invest Your Money

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 delight in, including through co-location,” Schapiro wrote.

In co-location, brokers and trading firms rent space next to exchanges’ trading engines, allowing them to place 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-quick 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 huge part of the Obama administration’s financial reform plot, 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 use high-frequency strategies, which include statistical arbitrage.

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

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

Kaufman said the United States needs a surveillance system in order to gather trading data and ultimately choose 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 Probing High – Frequency Strategies is a post from: Before You Invest Your Money

Hazem Khalid al-Braikan, who ran Al Raya Investment found dead with a self-inflicted gunshot wound to his head is a post from: Before You Invest Your Money

Hazem Khalid al-Braikan, who ran Al Raya Investment found dead with a self-inflicted gunshot wound to his head is a post from: Before You Invest Your Money