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November 1, 2010

ITG's Gasser Calls for Traffic Fee

By James Ramage

Traders who are big users of quote messaging should pay for their share of the quote traffic they generate.

Robert Gasser

In fact, regulators should seriously consider leveling a fee on those who send "excessive" numbers of quotes and cancellations into the market, said Robert Gasser, president and chief executive of Investment Technology Group. Income from such a fee could help pay for a much-needed consolidated audit trail, he suggested.

"Let's consider a fee for message traffic that creates tick data without resultant liquidity," Gasser said. "Folks that participate in this behavior need to share in the burden it creates for our industry."

Significant spikes in message traffic have been a burden to market data systems across the industry, Gasser said. He spoke at the Security Traders Association's 77th annual conference, at the Omni Shoreham Hotel in Washington, D.C. Gasser addressed an audience of about 300 STA members. And he wasn't alone in his sentiments.

"Message traffic is beginning to outrun Moore's Law on processing power," Gasser said, referring to the theory about the rate at which the processing speed of inexpensive computer chips increases over time.

In particular, Gasser singled out firms that employ latency arbitrage strategies. These are firms that profit from delays in price updates between the market data feeds at the various exchanges and the consolidated tape system. He extended his message to all firms that flood the markets with buy and sell orders, followed shortly with cancel orders. Such message traffic puts a strain on computer processing power.

"Latency arbitrage profit is a tax on our equity market infrastructure," Gasser said.

The industry has seen exceptional growth in message traffic recently, Gasser said. For example, he noted there has been a 57 percent increase in message traffic at Nasdaq alone over the past few months.

Attendees mostly were in agreement that an answer to the spike in traffic was needed. Traders Magazine spoke to four conference attendees who heard Gasser's speech. Message traffic has indeed been rising rapidly, they agreed.

One exchange executive, who didn't want to be quoted directly, said a fee on quote traffic was a good idea. But such a fee needs to be implemented evenly across all market centers to be effective, the exec added. If not, then traders could shift their order flow to those market centers with the lowest fees. In addition, he said any fee that was harmonized across market centers should be implemented gradually.

A trader at a large buyside firm offered two possible solutions to burdensome message traffic. Regulators could either press for a fee, or they could find a way to moderate or filter the amount of outgoing quotes.

"Either way, something has got to be done," the buysider said. "Our market data costs have been rising exponentially for years--I mean, exponentially. They've clearly gotten out of hand."


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