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II Research Group

Big Asset Managers Fight Rising HFT Cancel Orders

E-MAIL PRINT

July/August 2010

Keywords: high frequency trading, asset management, cancel and replace orders, trading

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

Comments (2)

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James Aug 18, 2010

Uncertainty=increased volatility. At issue are canceled orders within milliseconds. Prices appear and disappear before market participants can act. This creates confusion as to what the real bid/ask is. The uncertainty causes increased volatility because longer-term traders widen their bid/asks. Sidebar: Do we really have a true market when bids/offers are canceled under 15milliseconds? Is this the most efficient way for a market to clear trades?

PRB Aug 18, 2010

"There have also been rumblings from fund managers who are worried about the volatility created by canceled orders, which can hurt long-duration strategies." How do cancelled orders create volatility? A price is posted and then taken down if not dealt. If it happens every few microseconds or every few minutes it's not at all clear how cancelling orders creates market volatility.