The Midas touch

96.8% of trades placed in the US stock market are cancelled

October 9, 2013
October 9, 2013

New data from the US Securities and Exchange Commission (SEC) show that only 3.2% of the orders placed in the stock market in the second quarter of 2013 actually went through.

Although the SEC isn’t saying as much, experts think it’s a sign that high-frequency trading are flooding the market with orders, overwhelming the average retail or institutional investor. That’s particularly true in stocks traded on exchanges, says former high-frequency trader Dave Lauer. There, a full 99.76% of orders that were placed were never carried out.

High frequency trading firms have been known to flood the market with orders, trying to determine the price institutional or retail investors are offering, then cancel 90% of them a split-second later. This can artificially alter the price of a security, netting high-frequency traders profits at the expense of their counterparties. True, those profits are small—often just pennies. But over time, these firms make millions of dollars.

“A penalty on excessive cancellations, rigorous enforcement of rules regarding information access, and a top-to-bottom study of the NYSE’s 40-year-old Market Data System would be good places to start,” Charles Schwab, founder of the eponymous discount brokerage firm, and Walt Bettinger, its CEO, wrote in a Wall Street Journal editorial (paywall) in July.

Eric Hunsader, the founder of market data firm Nanex LLC, estimates that 90-95% of all orders placed come from high-frequency machines. About 70% of executed trades are made by high-frequency machines, according to the research firm Aite Group.

The SEC says it is doing all it can to catch up with high-frequency traders and to better understand the current state of the markets. The organization has been sorely underfunded, and only recently purchased a data analysis tool called “Midas” that will allow it to monitor markets in real-time.

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