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Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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December 1, 2011

Message Traffic Fee Debate Rages

Message Traffic Fee Debate Rages

By By Peter Chapman

Despite complaints from brokers over soaring levels of market data, officials from some of the leading exchanges indicated they weren't enthusiastic about slamming on the brakes.

"I don't want to put on a fee that is onerous, or be forced to by the SEC," Chris Isaacson, chief operating officer at BATS Global Markets, said during a session on October 14 at the Security Traders Association's annual conference in Palm Beach, Fla. "Everyone's market data technology costs would probably go down, but spreads would widen and investors would be hurt."

At issue are broker complaints over the tremendous increase in quotes being streamed into exchanges by high-frequency trading firms and the cost of processing all those messages.

Some firms, including Goldman Sachs, are questioning whether the Securities and Exchange Commission should step in and force exchanges to impose fees on those customers that send in a large number of quotes relative to the number of trades done.

That could lead to a reduction in the amount of quoting.

The SEC is considering taking action. David Shillman, a senior official in the SEC's Division of Trading and Markets, noted at a recent industry conference that the SEC was mulling the idea of directing exchanges to implement some sort of quote-to-orders fee.

This doesn't sit well with the exchanges.

"We don't think the regulators have the authority to dictate order-to-trade ratios or cancellation levels," Bryan Harkins, chief operating officer at Direct Edge, told the STA crowd. "That's a commercial decision."

According to data supplied by the Financial Information Forum, Direct Edge's EDGA exchange sends out about 109,000 quotes per second.

Some have criticized the exchanges for a lack of concern over the issue and an approach that favors the large quoters, which provide much of their liquidity, over other members.

"The criticism is that the exchanges are HFT-friendly," Harkins added. "But in fact not all traffic is good traffic. We have throttles. Not every customer likes throttles. We do that to protect the market. Every customer has a certain message limit per second."

Throttling, done to some degree by most exchanges, involves slowing down the rate at which an exchange will accept incoming messages.

Nasdaq OMX is taking a look at the issue, according to Michel Finzi, Nasdaq's head of U.S. equities, but it is also worried about overburdening those members who provide the exchange with most of its liquidity.

"If entities are sending a significant amount of quotes and never generating a trade, then it's not a good idea for us to support that," Finzi said at STA.

"But one must also be careful because there are certain models and folks who provide value to the marketplace," he added. "That includes market-maker strategies with two-way prices in stocks. In volatile times, they have to address those and amend those quite regularly."

Even if the exchanges don't act, it is not impossible that regulators won't unilaterally try to rein in message traffic with fees. They do so in Canada, according to Robert Fotheringham, a senior vice president at the Toronto Stock Exchange.

Fotheringham told STA attendees that the Investment Industry Regulatory Organization of Canada, the Canadian equivalent of the U.S.'s Financial Industry Regulatory Authority, has begun "factoring in messaging when they allocate charges for surveillance."