In what should come as a surprise to absolutely no one, it seems that political donations from HFT Firms to politicians have increased. That data comes from a report by the Washington based nonprofit group Citizens for Responsibility and Ethics in Washington (CREW).

What would make HFT firms suddenly get political? Do they realize that there may be a wheel that needs greasing? The study revealed that campaign contributions rose 673% and lobbying jumped 93%. An even deeper look reveals more and it doesn’t take a rocket scientist to see what is going on here. “Six of the top 15 congressional recipients of contributions from HFTs during the 2008, 2010, and 2012 cycles are from either Illinois or New York, both key financial centers. Sen. Mark Kirk (R-IL) received more contributions from HFTs than any other member of Congress, taking in $125,800.” [1]

Also, “Sen. Chuck Schumer (D-NY), a member of both the Senate Finance Committee and the Subcommittee on Securities, Insurance, and Investment of the Senate Banking, Housing, and Urban Affairs Committee, received $77,200, making him the second largest recipient”.[1]

You don’t say!

Oh, but “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.”[2]

 Oh, whew, I was getting worried there.

This is just too good. So first, are you telling me that the majority of political contributions came from the 2 places that hold the majority of our market exchanges servers?

 Yes, yes you are.

Then, secondly, are you also telling me that the second largest recipient of money went on record for more legislation? “But wait!” you say, “that contradicts your point!”

Not exactly. Look at what he said again.He wants to regulate high-speed firms so they can’t pull out of markets during a “crash”, much like a market maker has to stay in a stock.

Let me digress for a moment – so market makers, if they pull out of exchange-listed stocks, can only jump back in 20 business days later. There is a one time exemption, but as a whole, you’re out for 4 weeks. Except for this: a market maker doesn’t have to pull out of the stock to effectively not be in it. Now, the SEC did pass the “stub quote” rule in 2010, which effectively says that a market maker must stay within a certain percentage of the NBBO. That was brought on after the May 2010 flash crash. But as of this writing, nothing has been implemented to make HFT firms act like bonafide market makers.

So nothing has been done, and much like the pseudo – “we want change and we want it now!” rabble rousing audible in America  directly after a national event (gun control, flood control, pot control, etc…) it would seem as if everyone’s focus has once again shifted away to the new topic du jour.

Unfortunately for Mr. Schumer, making HFTs act like a market maker doesn’t really solve the “volume vacuum” that we have seen during crashes. In those instances, as a crash is unfolding, the volume on the bid side dries up as the HFT’s effectively take their ball and go home. Regulation to make them stay in the game doesn’t really matter if they are so far from the action they can’t see it.

Look, I am well aware of how wheels get greased. As a market maker, I offered rebates and forms of incentive for valuable order flow. That is how the game is played. We could go on and on sighting instances of politicians taking money from interest groups and the examples I’ve laid out here are really no different. The way our government is run is that the wolf is guarding the hen house.

Unfortunately for the general investing public, we are the hens and the wolves remain hungry.