Eduard Gismatullin and Sam Mamudi report Chinese securities regulators are preparing some of the world’s strictest regulations on a trading practice at the heart of the global debate over high-speed computerized markets.
The draft rules are designed to prevent traders from flooding exchanges with orders they don’t fill by charging market participants fees for habitual cancellations. The proposal, which could come into force next year, echoes a plan by U.S. presidential hopeful Hillary Clinton to discourage high-speed trading strategies that she says could destabilize markets.
Reining in cancel rates might unfairly punish firms using legitimate computer formulas to constantly update the prices at which they offer to buy or sell securities, according Bill Harts, chief executive officer at Modern Markets Initiative, a U.S.-based trade group for high-frequency firms. Traders who use automated strategies say they often cancel orders because the speed at which markets now move makes many quotes irrelevant almost immediately.
“Cancellation messages are the tools of our trade,” Harts said by e-mail. “Like the shopkeeper who cuts his price in response to the competitor across the street, they are what enable us to continuously narrow spreads, saving investors’ money. Therefore, a tax on cancellations is a tax on competition, and it would ultimately be paid by investors receiving worse prices.”