HIT THE BRAKES

Major stock exchanges are trying to slow down high-frequency traders

Obsession
Future of Finance
Obsession
Future of Finance

The InterContinentalExchange, which bought the New York Stock Exchange about a year ago, released new rules yesterday for a few new no-nos for trade order types. Mainly, you can’t enter an order or market message with:

  • The intent to cancel or modify the order before execution
  • The intent to overload, delay, or disrupt the systems of the exchange or other market participants
  • The intent to disrupt orderly trading, the fair execution of transactions
  • The intent to mislead other market participants

Also, you can’t knowingly enter any bid or offer for the purpose of making a market price that does not reflect the true state of the market; nor can you show reckless disregard for any adverse impact of an order or market message.

In plain English, the exchange is going after a few of the strategies that help high-frequency traders (HFTs) make their money. This video from data provider Nanex illustrates what it looks like when HFTs pump the market full of orders to suss out a good deal:

As the Financial Times has reported, the CME Group, which runs several commodity and options exchanges, made a similar move a few months ago.

It’s not hard to see why. The US Securities and Exchange Commission and the Commodities Futures Trading Commission have been cracking down on so-called “disruptive trading” as part of the Dodd-Frank financial reform bill. Outside the market-wonk bubble, Flash Boys, Michael Lewis’ book about HFTs, did an effective job of rattling investors’ trust in a system routinely exploited by HFTs.

And trust is vital to the bottom line at the exchanges.

“I think to the extent we can help generate more confidence… that as more money comes back in, the New York Stock Exchange is going to benefit,” Scott Hill, ICE’s CFO, said at a UBS financial services conference in May.

Translation: If we curb the scary HFT stuff, more people will trust us enough to trade with us.

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