The Curious Story of the HFT Firms and Rahm Emanuel


………………I write this morning note to you after reading an article in the Chicago Tribune (titled Emanuel’s Rare Political Reach Fuels Fundraising Machine), and after taking a call yesterday from the son of a neighbor of mine, lamenting his inability to make money and get ahead working for a trading firm in Manhattan (he and his coworkers are taught “swing-trading” strategies and set loose with the firm’s capital). He called to ask me for career advice; he loves working in the capital markets and is looking for guidance on where to focus for a long-term career. I found myself reaching for good advice.

We all play a competitive game, whose object is to extract return and dollars from Mr. Market. Some of us choose long term strategies, seeking to find undervalued companies that can double or even triple over a period of years. Some of us choose short term automated strategies designed to take less risk, yet still extract alpha, over a period of minutes, seconds, and even sub-seconds. Of course there are also many of us that choose strategies somewhere in between; my neighbor’s son falls somewhere in this camp.

If the playing field is simple, with the same rules for all, the free market system decides the appropriate mix of short term, medium term, and long term traders. Referees are needed to insure fair play. Referees have always included regulators like the SEC, CFTC, and FINRA. In the past, referees also included the stock exchanges (who perhaps performed imperfectly). Today the refereeing is really only done by the regulators, which made my reading of the Chicago Tribune article pained and uncomfortable.

Unfortunately, on Wall Street the playing field is never simple, and there are never shortages of players who figure out that they can achieve high returns by gaining edge via preferential treatment, as well as playing field rules written in such a way as to specifically advantage them. While it is not illegal for such firms to try to use their influence to tilt the scales, it is accepted today, and the behavior normalized. I don’t know why it is not illegal. Should it be legal? When the regulators are the only referees, shouldn’t there be laws that even prevent them from being placed in the situation of being influenced?

Please read the highlighted article in full today. For now I will highlight a few tidbits:

–          Three Chicago Trading Firms (DRW Trading, Chicago Trading Company, and Infinium Capital) traveled to Washington with Rahm Emanuel to lobby the CFTC to not create rules that would require them to hold more capital in their high frequency trading businesses. They had paid Emanuel $182,000. Don Wilson flew Emanuel to Washington for the meeting on his own private jet.

–          When the CFTC drafted the final rules a few months later, these firms got the rules re-written for their favor. The three firms paid Emanuel an additional $187,000. Two other Chicago firms not at that meeting, Peak 6 and Chopper Trading, gave Emanuel an additional $334,000.

–          The Chicago elite trading firms are actually responsible for more than $14 million of the $30 million Emanuel has raised since fall 2010.

–          CFTC general counsel, Dan Berkovitz, had this to say about the Emanuel – CFTC meeting: “there was nothing where we made decisions based politically, but… when a person like that comes in, it does make you think about it considerably.”

–          After the meeting, Emanuel held fundraisers at the posh homes of Chopper Trading’s and DRW’s CEO’s  homes. Two dozen additional checks were deposited in Mayor Emanuel’s account.

Remember, Emanuel was Obama’s Chief of Staff during the financial crisis, after which he became Mayor of Chicago.

The details and the connect-the-dots in this story are remarkable. If any of you had any question why certain types of players flourished in our stock market over the past decade, even ones that were persistently fined for abusive behavior, after reading this article you no longer have those questions.