Direct Edge and Nasdaq bid to curb HFT messaging with fines

US exchange operators Nasdaq OMX and Direct Edge have outlined incentive plans designed to encourage high-frequency traders to cut back on the huge number of messages they generate.

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Direct Edge and Nasdaq bid to curb HFT messaging with fines

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Last month Securities and Exchange Commission chairman Mary Schapiro raised concerns about the number of trading messages sent by algorithms that are then cancelled and instantly replaced with new ones.

Schapiro, worried that the practice places huge pressure on exchange technology and could disrupt markets, floated the possibility of imposing fees for traders that cancel too many orders.

Direct Edge now wants to introduce a message efficiency incentive programme (Meip) from 1 May that will see traders with a message-to-trade ratio of more than 100-to one-have their rebate reduced by $0.0001 per share.

Nasdaq OMX is planning a similar measure, penalising traders that send over one million messages a day if fewer than one in a hundred result in a trade.

The programmes, which still require SEC approval, come on the heels of similar proposals set out on the other side of the Atlantic by Deutsche Börse and Borsa Italiana.

In a message to members, Bryan Harkins, COO, Direct Edge, says: "It is important to balance the critical importance of technology to liquidity provision and market operation with effective message traffic efficiency incentives to acknowledge the costs that message traffic has on today's markets."

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