Fewer messages are being blasted at US stock exchanges by high-speed traders ahead of pending rule changes that penalise some automated trading activities.
The practice of electronically sending thousands of quotes each second to the stock market has come under scrutiny over the past two years, following the May 2010 “flash crash” and regulators’ concerns about whether trading in milliseconds is detrimental to some investors.
Such trading is seen as necessary by many traders and academics, who say that it dampens wild market swings and allows market-makers to offer better prices to investors.
But it is viewed as costly by other participants and some regulators, who say investors are forced to spend more on technology to accommodate the bandwidth necessary to record the millions of quotes generated per day.
Three US exchanges are in the process of adopting policies that would penalise traders for exceeding set ratios of quotes per trade, such as more than 100 quotes per trade, in the hopes of cutting down on wasteful activity.
Nasdaq and Direct Edge are considering them for equities, while the IntercontinentalExchange has begun rolling them out in its futures markets. Ahead of such changes, fresh figures suggest the volume of tradeless quotes may be declining as traders adjust their strategies, although declining price volatility and trading activity may also be having an impact.
Steve Hammer, founder of HFT Alert, a service that collates market data, analyses and resells it to traders, found that the average daily level of quotes with no trades dropped to 3m per day over the past two weeks of March from average levels of 11.7m quotes over the past year.
“Since the Securities and Exchange Commission and many exchanges have announced their intention to more closely scrutinise such practices in early March, this has had a dramatic and very noticeable change in quote traffic,” said Mr Hammer.
Direct Edge said it was not yet seeing any changes in quoting patterns on its market.
Nasdaq said it could not comment on any trends, as it is awaiting approval of its penalties for excessive messaging by the SEC, which has asked for public comment on the rules.
There are also other factors at work, such as a broad decline in market volatility, which necessitates fewer price changes by market-makers. The Vix implied volatility index has dropped by 50 per cent since August.
Analysts at Credit Suisse have seen a steady decline in the number of changes in the best quotes to buy and sell individual stocks since that time. The daily number of changes has fallen from a peak above 400m in August to hover at about 150m since January.