Britain’s Foresight Program found that high-frequency trading has generally benefited investors-but a European Commission task force recommends that all orders live for at least half a second. In the United States, exchanges began putting clamps on excessive messages from trading firms that canceled far more orders than they turned into transactions.
And on both continents, the specter of some sort of tax on transactions still hangs over the heads of firms that consider a single day to hold as many profit-making opportunities as others see in a full year.
The bloom may have come off the rose in 2012 for high-frequency trading. Profits are down from a peak of $7.2 billion in 2009 to an estimated $1.8 billion this year, according to Tabb Group. With overall volumes dropping, it’s becoming increasingly hard to cover overhead with a profit of less than a penny a trade, by the calculation of partner Alex Tabb.
Whether 2013 turns out rosier remains to be seen. Programs to curb excessive messaging were implemented this year by both Nasdaq OMX and Direct Edge. While Nasdaq is pleased with the results of its effort, Direct Edge pulled the plug on its plan.
“We’ve seen some change in behavior as a result” of the program, said Nasdaq OMX spokesman Robert Madden. “The traders that were outliers, that had very much excessive quoting traffic, have curbed those quotes to fit closer within the parameters of our 100-to-one [non-marketable order-to-trade] ratio.”
Nasdaq charges its members at least $0.001 per order if their non-marketable order-to-trade ratio exceeds 100-to-1. The policy, which went into effect June 1, affects only non-marketable orders, or those posted outside the national best bid and offer.
For its part, Direct Edge introduced a message efficiency incentive program in June that reduced its rebate by $0.0001 per share for firms that trade only once for every 100 messages they transmit. But the exchange stopped the program in August.
In a filing with the Securities and Exchange Commission, Direct Edge said, “by not adequately isolating purely inefficient message flow, the (program) may have unintentionally captured, and therefore disincentivized, order behavior that benefits market liquidity. For example, the (program) potentially discourages market participants from posting multiple levels of liquidity in less actively traded securities. Thus, while the exchange’s intention was to encourage efficiency and consequently attract more liquidity, the (program) appears to have resulted in the opposite effect.”
Meanwhile, a bill to impose a transaction tax was introduced by Rep. Keith Ellison, D-Minn., in September. Ellison’s bill, the Inclusive Prosperity Act, would tax stocks at $50 per $10,000 traded; bonds at $10 per $10,000 traded; and derivatives at $0.50 per $10,000 traded.
The bill is pending in the House Committee on Financial Services, said a spokeswoman for the congressman. No hearing date has been set. If there is no hearing this year, Ellison is likely to reintroduce the bill in the next session of Congress, she said.
Since 2010, the House of Representatives has introduced 10 different transaction tax bills, and the Senate has introduced four. To date, neither house of Congress has passed such a proposal.
The European Union is also eyeing the regulation of high-frequency trading. The EU is encouraging France, Germany, Italy and seven other nations to cooperate on the creation of a financial transaction tax. However, the 10 states have yet to agree on a common approach.
The European Parliament voted in September that all high-frequency trading orders should be valid for one half second. The rule is proposed to be added to the EU’s Markets in Financial Instruments Directive and would apply to almost all market players.
