High-Frequency Traders May Face EU Fees

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Under European Union plan to limit market abuse, high-frequency traders and similar investors may be required to pay penalty fees when they create market volatility by placing excessive numbers of canceled orders.

The introduced fees would be similar to the fee structure introduced last year on Nasdaq OMX Group Inc. (NDAQ) exchanges in Nordic countries.

The plan addresses May 2010 “flash crash” during which the Dow Jones Industrial Average (INDU) lost almost 1,000 points.     Although, according to some reports, high-frequency trading didn’t trigger the plunge, it intensified the “liquidity crisis” that followed the crash.

More specifically, high-frequency trading can lead to a very high number of canceled orders.    In turn, such high cancellation rates can potentially lead to abusive and manipulative practices.     One of these practices called “layering” where traders place large orders they have no intention of allowing to clear.     One of the proposals considered under the plan requires traders to pay penalty if they exceed a pre-agreed ratio of canceled orders against transactions completed.

Anna Timone (195 Posts)


Comments

  1. is right!

  2. Colin Reimer says:

    Great post Anna. I hope we see more from you here. :D

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