Prop traders call for engagement on message fees
collaboration is fundamental to ensuring exchange charges to control message
traffic do not impair liquidity, says Mark Spanbroek, vice chairman of the
FIA’s European Principal Traders
"We had hardly any
interaction with exchanges on this issue prior to the tariffs being
revealed," said Spanbroek, a former partner at electronic market maker
GETCO. "Exchanges realise that different asset classes have different
ratios and that dialogue with members is the way to harbour liquidity and
to have an orderly market. We also think there needs to be more of a
distinction between market makers and other exchange members, on the one
hand, and other types of market participants that may need a different
Industry Association (FIA), a trade body covering derivatives market, set up EPTA,
which currently counts 21 prop trading firms as members, in June last year as a
response to anticipated new rules for high-frequency trading (HFT) firms. In
addition to MiFID II, which currently proposes a series of measures that will
cover all users of algorithms, the European Securities and Markets Authority
has approved guidelines relating to automated trading practices that will come
into force from May.
In the last few
weeks, a number of exchanges have proposed or implemented new schemes that
charge members if they exceed a specified order-to-trade ratio. In the US,
Nasdaq OMX and Direct Edge want to introduce charges from May and June
respectively, with both proposing a ratio of 100:1. Direct Edge members that
breach the 100:1 ratio will face a rebate cut of US$0.0001 per share. Direct
Edge is so far the only exchange to propose market maker exemptions.
Nasdaq OMX wants
to take an approach similar to the IntercontinentalExchange, weighting charges on the proximity of messages to the
national best bid and offer. In Europe, Borsa Italiana will apply a tiered
ratio with charges ranging from €0.01 to €0.025, while France is pushing
forward with plans that would charge 0.1% for failed, cancelled or modified
orders, reduced to 0.01% if they stay below a certain daily threshold.
Spanbroek points out that the
message traffic penalties are nothing new and were originally implemented to
ensure the stability of exchange systems. But previous penalties only
constituted a warning for the trading members concerned.
“In the past, we have
seen thousands of 'nonsense' messages and have told exchanges they need to
act," he says. "We think the more formal and stringent rules coming
into force are an excellent step."
The exchange initiatives have
come under fire from some industry observers, particularly Themis Trading. The
US agency broker has long been vocal in its opposition to high-frequency
trading, and argues the schemes proposed by Direct Edge and Nasdaq OMX have
order-to-message ratios that are too high and fees that are too low to have an
But Spanbroek adds the success
of the new rules will depend largely on the ability of trading venues to
calibrate their message traffic charges through practice. This includes a more
considered approach that takes into account differences in exchange technology
and the liquidity profile of different assets.
“The impact of these charges
and penalties on liquidity remains to be seen,” he said. “The biggest
potential issue is that the charges might reduce the amount of liquidity
available in the exchange-traded markets, which would encourage more OTC
trading. For example, in a highly liquid stock the number of
order messages is much higher in a less liquid stock, so it is important
that limits policy takes this into account.”
The EPTA along with its US-focused equivalent the Principal Traders Group also issued a set of recommendations to assist trading firms in establishing internal procedures, processes and controls for the development, testing and deployment of trading software. The two groups believe that the best practice guidelines are needed to help firms meet regulatory obligations and manage the risks associated with trading software and infrastructure.
The recommendations cover software development, software testing and change management and offer principles, rather than specific policy recommendations, to assist trading firms in establishing internal procedures, processes and controls.