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Tick Tax

Just returned from a very stimulating week in Japan where I was asked to present on High Frequency Trading and global fragmentation at the Japan International Banking & Securities Systems Forum. There was a great point made by Chuck Chon, CTO of SBI Japannext, when he was asked how his alternative venue differentiated itself from the mighty TSE. Amongst other points, Chuck confirmed that SBI was committed to lower tick sizes as this has the effect of narrowing the bid-offer spread for any particular stock. He went on to say that crossing the bid-offer spread is like a tax that is levied every time anybody (retail or institutional) participates in the market. The challenge, however, is that traditional market makers actually like a wide spread as they are the ones who are effectively charging the “tax” in the first place. High velocity HFT firms, on the other hand, prefer very low spreads as they are constantly in and out of the market.

So primary markets have to decide whether to maintain a higher tick size, which keeps their traditional market makers happy, or bow to the pressure from the HFT community. This reminded me of a similar debate in Europe and especially in the Nordic market where NASDAQ OMX Nordic only reluctantly agreed to reduce tick sizes when they came under stiff competition from the MTF community.

This whole issue seems to highlight the differences between the traditional business models for equity trading and the new world order that is emerging. The bizarre thing is that, at least in the case of tick sizes, the interests of the HFT community and the retail punter seem very well aligned.

Anyway, my thanks to everyone at Fidessa kk in Japan and especially to Hiroshi Matsubara for being such a great host and guide.



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