Nearly eight months after a dramatic flash crash in Treasury yields shocked the bond market, federal regulators have released their investigative report into the financial mystery.
But reporters leafing through the 70-page report on Monday saw that it contained an industry term even many veteran finance hands had not heard before: "Principal Trading Firm." And, this being Washington, the unfamiliar term had an acronym, "PTF."
That prompted the question: WTF does "PTF" mean?
It turns out that the new term has an only-in-Washington back story—a tale that may shed some light on the relationship between the high-speed trading industry and the regulators who are struggling to oversee it and understand its widespread financial implications.
In the background briefing, officials simply said their report would not use the term "high-frequency traders," or "HFT," that has been used in the media to describe a group of firms that specialize in super-fast, computerized algorithmic trading in a wide variety of markets. That's because high-frequency trading describes a financial technique, not a set of firms, they said.
On page 50 of the report, regulators defined just who was included in the new term, "PTF," including principal investors who deployed "proprietary automated trading strategies," with one key being "low latency," or high-speed, trading. The new category is also distinct because the firms do not have clients, which is also a characteristic of several high frequency trading firms.
In other words, what most of the investing public knows as HFT.
"You don't have to be a rocket scientist to know that this is a pure HFT designation," said a source familiar with the drafting of the report.
And the source said part of the reason regulators are so wary of using the term "HFT" is the bad publicity the term earned in Michael Lewis' expose of the HFT industry, "Flash Boys."
"Officially, on a paper document, we do not want to use that word," the source said. "The focus that Michael Lewis got on HFT, and the focus that the word HFT has gotten in the last couple years , people are nervous about using the term."
But it turns out that regulators did not invent the term "Principal Trading Firm."
High-frequency traders did.
In March 2010, a group of high-frequency trading firms affiliated with the futures industry trade association FIA sat down to decide what to call the industry segment most of the public knew as high-frequency traders. "It was a group of businesses coming together trying to decide what we call ourselves," said Jim Overdahl, a partner at Delta Strategy Group in Washington and an advisor to the trade association's "Principal Traders Group," which devised the term. "I think it was a genuine attempt to come up with a descriptive name."
That's because the firms included tend to invest their own principal and not have clients as do traditional banks and hedge funds, Overdahl said. Current members of the group include some of the leading names in high-frequency trading, including Allston Trading, Citadel Securities, DRW Holdings, Jump Trading, and others, according to FIA's website.
Those firms are pleased that federal regulators have begun using their term. Overdahl said "principal trading firm" is simply a more accurate term to describe the industry than "high frequency traders," and it separates the group from more traditional hedge funds and banks. "It should be welcome in this discussion to recognize that this is a distinct group of market participants," Overdahl said.
In the end, regulators adopted the industry group's own term for itself.
Or, you could say: it was the HFT lobby, FTW.