March 08, 2012

It's amazing that anything can be heard over the roar of high frequency trading -- millions of trades a second followed immediately by cancellations -- but the message is about to be heard: HFT firms and their pell-mell practices are about to be forced into the slow lane.

Last month SEC Chairman Mary Schapiro expressed concern that high-frequency trading firms were harming the market and today two US exchange operators put forth plans to curb the practice of hedge funds and prop shops that put out thousands of bids a second and then cancel those orders until a better one comes along.

How can hedge funds slow down their high frequency practices after years of going so fast? Jamie Selway of ITG shared his ideas.

According to Finextra:

Direct Edge now wants to introduce a message efficiency incentive programme (Meip) from 1 May that will see traders with a message-to-trade ratio of more than 100-to one-have their rebate reduced by $0.0001 per share.

Nasdaq OMX is planning a similar measure, penalising traders that send over one million messages a day if fewer than one in a hundred result in a trade.

Direct Edge and Naadaq are not alone with their concerns. Exchange operators in Europe Deutsche Börse and Borsa Italiana have made similar proposals recently

One wonders what caused this new wave of self-policing. Remorse? An admirable burst of restraint? Hardly. The industry is showing signs that it learned some hard lessons from the mortgage and credit crisis of 2008 -- and it doesn't want to see a new Sarbannes-Oxley/Dodd-Frank/Volker Rule for high-frequency traders who have roiled the markets to nearly everyone's dismay.

At last October's Advanced Trading Buy Side Summit, a panelist caught everyone's attention with a sharp analogy. "If a trader on the stock exchange floor behaved in the same manner as an algorithm from a high frequency firm," he said, "there would be fistfights on the trading floor."

Expect to see some speed limits in the coming weeks.

ABOUT THE AUTHOR
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining ...