Err… Don’t Quote Me
Traders Magazine published an article in their April 2012 issue titled Exchanges Set To Tax Heavy Quoters. The article highlight the “efforts” of two stock exchange families, Direct Edge and NASDAQ, and how they intend to deal with the troublesome bandwidth-constraining and potentially manipulative excessive quoting by subset of HFT firms. Upon reading the title of the article, we at Themis were excited that something new must have surfaced, where the exchanges highlighted were actually going to actually “tax” offending HFT firms. After reading the article we let out a collective sigh around the desk, as nothing new had surfaced.
We highlighted Direct Edge and NASDAQ’s “iron rule” last month, in our March 8th blog post titled HFT in Detention for Excessive Cancellations! LOL. From that post:
Direct Edge’s plan is to:
A) Look at HFT’s that cancel more than 100 orders for every one they trade, which is an even higher threshold than the 90-95: 1 ratio the SEC thought was ludicrous. So you got margin there first off.
B) If your ratio exceeds that 100:1 ratio over a one month average, they will cut your rebate by a whopping single (1) mil. So no tax; they will just cut your rebate. And they won’t cut your rebate in half, or take it away for a month. They will just reduce your rebate check by less than 3%. LOL.
NASDAQ’s plan is to charge $0.001 per order if the offending member firm’s order to trade ratio exceeds 100-1. Oh… only on orders outside the NBBO. Oh… and they exempt “market makers.” Not only has NASDAQ exempted market makers, the largest HFT bucket – the ones who practice rebate arbitrage to collect rebates while playing musical chairs, they have just proposed a brand spanking new Market Quality Program that rewards their largest BFF (that’s “best friends forever” … my little girl taught me that) market makers with… wait for it… more rebates! By the way, you all have 21 days from April 6th to comment on the NASDAQ BFF program on the SEC’s website.
The stock exchanges, since becoming for-profit mechanisms, especially post REG NMS, have repeatedly catered to their largest HFT customers, damned if it was good for the marketplace as a whole and damned whether or not it might be harmful to investors or capital formation. Flash order types. Slide Not Hide. Ever increasing rebates for their largest tier HFT firms that come from somewhere! RLP programs. SLP Programs. On and on.
Let’s be clear. These exchange public relation ploys are meant to hold up and show regulators. “See… we are doing something; you need do nothing!” This is too bad. The message traffic has increased 500% since the Flash Crash in 2010, for which everyone pays the price. And we still have so many other problems in the marketplace that give investors pause. If the exchanges want real volume to come back, perhaps they should clean up and simplify the markets, eliminate all those silly routes, create simple order types meant for all traders in an equal playing field, as opposed to order types designed to insure one class always is at the top of the book versus the others.