HFT: Eurex Rule Shows How To Fight Spam

Eurex

My position is that some forms of high frequency trading (HFT) are pernicious spam. Flooding the wire with orders, and then cancelling those orders a millisecond later is a good example. The algorithm behind these instructions does not actually want to trade at any or all of these prices. It is trying to discover the behavior of other algorithms currently in the market, or push the market in a particular direction. These algorithms are like Nigerian princes selling penis enlargement pills. They are spammers. Now someone is doing something about them.

The classic answer to a ‘tragedy of the commons‘ problem is to create a usage fee, and that is what the European exchange (coyly named Eurex) of Deutsche Boerse is going to do. If your monthly Order-to-Trade Ratio (OTR) is over 1.0, you’re a spammer. Yes, there is room built into the calculation for market makers and other obvious details. The point is that traders in the market intending to actually purchase or sell are going to have ratios near 1, and spammers are going to have a ratio over 10,000.

I think it is an excellent idea, as far as it goes. Does it go far enough? No.

The proposed rule looks at behavior over a monthly period to decide whether to impose a penalty. In the world HFT, a month is like the time from the last Ice Age until now.

If you want to make this work for HFT, operate at the speed of HFT. Check the OTR every minute. Check for intervals that start and stop on random millisecond boundaries.

And make the spammers pay in the currency they care most about – time. Every one of their messages is held back briefly. A five millisecond penalty should be enough.

This is a good initiative. We need more like it.

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