Large asset managers such as mutual funds and some hedge funds are meeting with legislators and lobbyists in the U.S. to discuss ways to clamp down on the high rate of cancel-and-replace orders originating from high frequency trading firms. “The rhetoric has picked up,” says the head of one bulge-bracket prime broker, who says that banks are also reevaluating their pro-HFT stance.
HFT shops send out and cancel orders at a much higher rate than other firms. Some traders told WSL that as many as 90 percent of their orders are canceled, in part because of strategies that “ping” the market looking for liquidity or trying to find out the direction of large orders, says Ari Burstein, senior counsel of securities regulation in capital markets at the Investment Company Institute. There have also been rumblings from fund managers who are worried about the volatility created by canceled orders, which can hurt long-duration strategies.
Dissenters may be voicing their opinions at a good time. The SEC is currently gathering input as it considers new rules to make HFT firms more responsible. Whether those obligations would include limits to canceled orders and whether the SEC has the jurisdiction to impose fees on such trades if their use is excessive remains unclear.
— Wall Street Letter
