The above chart is courtesy of Nanex LLC. The green line is the best bid over time (unchanging), and the red is a constantly updating best offer (changing thousands of times per second with no trades). Do you want that “liquidity”? Can you even access those offers if you wanted to?
Jason Zweig, veteran Wall Street Journal reporter, wrote a balanced article over the weekend addressing the assessment of a transaction tax to reign in HFT: Flash Tax: Why Levies on High-Speed Trading Won’t Work. My partner Joe is quoted in the article as saying that the danger of a transaction tax lies in unintended consequences. Manoj Narang states in the same article that a tax of just 0.01% would wipe out all high frequency trading. Mr. Zweig closes his balanced article by inserting his opinion: “slowing down today’s warp-speed markets is a good idea. But an ill-considered tax is no way to do it.” We agree.
We do wish, however that the WSJ article included the discussions Joe raised with him about an order cancellation fee. We think a broad industry-wide discussion of an order cancellation fee would serve great purpose. We can see the debate ensuing roughly like this:
- HFT Defense: We need to enter and cancel bids quickly to manage our risks. That is how we use technology to act as market makers. If you make this activity less profitable for us, then we will curtail our liquidity provision, and spreads will widen for you all.
- Non HFT players: Why is anyone entering thousands of bids and offers away from the market NBBO, many times substantially away, and canceling them within fractions of a second, to begin with? And even at the NBBO, why enter a bid for a stock you don’t want to buy? And what good is a bid that can’t be accessed? That liquidity provision does not help me, or any investor in the marketplace. It gives the appearance of manipulation, certainly. It is more akin to spoofing!
We encourage this debate, and the ferreting out of other issues around a cancellation fee. This type of fee, or tax, could fund an under-funded regulatory body, so that they can effectively begin to police the markets and fulfill their mandate of creating fair and orderly markets (currently they certainly are not fair, and they certainly are not orderly). This type of fee or tax would also affect those types of firms putting the greatest risk and strain on our system, which has intuitive appeal.
What do you think? Send us your opinions!