Last week, we posted a suggestion from T3Live about instituting an order cancellation tax.  We think this is an interesting suggestion. But to really understand why there are so many cancellations during the day , you have to dive into our current equity market structure.  Ask yourself:  Why would the exchanges allow such behavior to go on?  It seems like this would only be placing a huge amount of stress on their data centers.  The answer is in a little known change to the calculation of tape revenue.  In 2007,  Reg NMS was fully implemented and a change to the way they calculate how much tape revenue each exchange receives was approved.  Take a look at this note from Nasdaq on the topic, pay particular attention to the second bullet point, Quote vs. Trade:

 http://www.nasdaqtrader.com/content/productsservices/trading/postnms_revshare.pdf

So, as you can see, exchanges now earn revenue for not only trade reporting but for quote reporting.  And, to attract more quotes, the exchanges are very aggressive in rebating these fees to the subscribers who post the quotes.  And, by the way, we are talking about big money here.  The tape revenue business is over $500 million per year.  And, guess who pays those fees that the exchanges collect and pass through to their most active participants?  Thats right – you and me and any other trader who subscribes to some sort of market data.