Direct Edge formally ended their excess order fee after just three months of operation last Tuesday, with data showing the charge had no impact on the number of messages received by the New Jersey-based stock exchange.
The Message Efficiency Incentive Program, which began on 1 June this year, cut rebates by US$0.0001 per share for members with message-to-trade ratios over 100:1, but ended with no explanation from the exchange.
A month later, rival US exchange Nasdaq OMX implemented its own message traffic charge that uses a weighted order-to-trade ratio that levies fees based on the proximity of messages to the national best bid and offer. Under the Nasdaq scheme – which continues to operate – trading participants that exceed a 100:1 ratio will be charged between US$0.001 and US$0.01 per share.
Eric-Scott Hunsader, software developer for Nanex, which monitors exchange data, told theTRADEnews.com that neither scheme had impacted liquidity.
“Nothing has shown up at all. We have not seen any reduced message traffic on Direct Edge or Nasdaq OMX since they instituted these programmes," he said. “Our data analysis would have picked up any change in the number of messages sent, so my guess is Direct Edge’s limit was just too high."
Hunsader added there was evidence such programmes could work if the limit is set appropriately, as evidenced by a scheme operating at the New York Stock Exchange (NYSE).
“NYSE has a limit of around 300 quotes per second, and it's clear they actively police that because when there’s a lot of activity quotes are always around 290 or just under 300 per second,” Hunsader said.
The Direct Edge and Nasdaq OMX message fees have been criticised for not going far enough. In the Q2 edition of The TRADE, Sal Arnuk, co-head of agency brokerage Themis Trading, and author of Broken Markets, a book that explores the impact of high-frequency trading and changes to market structure, described the schemes as little more than a PR stunt.
“There is no tax there and these types of charges will have zero impact. What should happen is that the Securities and Exchange Commission should implement a 30-50 bps fee for firms that cancel a high proportion of their quotes,” Arnuk said.