Basta con il Cancellazioni

After the May 6, 2010, the SEC spent months investigating and trying to piece together the events that led up to the single most devastating day in US equity market history. They later created an all- star panel of some of the brightest minds in finance and economics to make some recommendations to prevent another Flash Crash. This panel was named the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues and included folks like nobel prize winner Joseph Stiglitz, former CFTC Chairman Brooksley Born, Professor Maureen O’Hara and former SEC Chairman David Ruder. After months of analyzing the facts, in February 2011, this panel made fourteen recommendations . Many of their recommendations such as single stock and market wide circuit breakers had already been talked about and were in the process of being proposed. But they did make a few bold recommendations that we thought really addressed some market structure problems. One of them was to impose a fee on excessive cancellations:

The Committee recommends that the SEC and CFTC explore ways to fairly allocate the costs imposed by high levels of order cancellations, including perhaps requiring a uniform fee across all Exchange markets that is assessed based on the average of order cancellations to actual transactions effected by a market participant.”

Over one year later though and we have barely heard a word on such a cancellation fee being proposed in the US. However, yesterday, we found out that Italy is planning to charge a fee for excessive cancellations starting April 1st.  An Italian exchange executive told the FT: “We use this from time to time when we feel that we could have an excessive use of message traffic. We have used the same kind of system in the past to prevent misconduct in the market.”

In the US, we have over a 95% order cancellation ratio. HFT’s will tell you that they are canceling this many orders so they can manage their risk. Most other investors are baffled and wonder why anybody would need to cancel 95% of their orders. Regardless, if an HFT is using more bandwidth in order to enjoy almost risk-free profits, then they should pay for this bandwidth usage. Just like a mobile phone carrier charges high volume subscribers for extra bandwidth usage, HFT’s should incur a fee for there extra usage.

While the European regulators have been setting the example of how to control behavior which could cause systemic market problems, our regulators continue to move at a snails pace. No doubt they have an army of HFT lobbyists knocking on their door and warning “If you make HFT less profitable for us, then we will curtail our liquidity provision, and spreads will widen for you all.” It’s time to call their bluff and propose some real market structure reforms like your Joint CFTC-SEC Advisory Committee has already recommended.

PS.  The blog post title today translates to “Enough with the cancellations.”