WASHINGTON-The Securities and Exchange Commission is looking to curb high-frequency traders' huge influence on stock trading and is considering charging fees for the myriad buy and sell orders that are later canceled, among other options.

SEC Chairman Mary Schapiro said a large portion of equities trading has little to do with "the fundamentals of the company that's being traded." She said it had more to do with "the minuscule aberrational price move" that computer-assisted traders with direct connections to the exchange can "jump on" in fractions of a second.

Such activity "worries me," Ms. Schapiro said in a breakfast meeting Wednesday with reporters. One solution would be forcing high-frequency traders to pay for the canceled trades that make up nine-tenths of all orders, she said.

And part of the conclusion:

The SEC also is weighing imposing fees on order cancellations, which constitute "a vast majority of orders" submitted by high-frequency firms, Ms. Schapiro said. An estimated 95% to 98% of orders submitted by high-speed traders are canceled as the firms rapidly react to shifts in prices across the stock market, according to Tabb Group, which tracks trends in electronic trading. The possible fee, previously mentioned in a joint advisory committee of the SEC and CFTC, would likely be a tiny fraction of a cent per canceled order, experts say.

Critics worry that excessive cancellations are straining the ability of the stock market to handle trading activity. But high-frequency firms say that if they are forced to pay a fee for cancellations, they won't be able to trade as aggressively. It would reduce liquidity in the market by forcing them to buy at higher prices and sell at lower prices, in turn hurting ordinary investors, they say.

David Fuller's view Many observers, including Fullermoney, attribute the increased volatility seen in markets since 2007 to the growing dominance of high-frequency trading (HFT). Do we really want these machines to muscle the markets?

It is disingenuous of HFT firms to say that they increase liquidity. They increase volume, which is why the exchanges have encouraged the practice and allowed them priority access for upfront fees. However, the 'pinging' of orders (issuing thousands of small bids and offers to identify genuine institutional buy or sell orders, similar to seagoing fish factories using sonar to target schools) is predatory and can lead to front running. This makes it more difficult for institutional investors to execute large transactions and the volatility frightens away private investors.


Among the many fine Comments in response to this WSJ article, this one was posted by Avner Mandelman:

"The vast majority of high frequency trading seems to be little but welching on an obligation, accompanied by front-running: The computer sends a signal that asks for an offer to learn the seller's intent. The seller's computer responds with an offer. But before the second trade-confirmation signal can be sent, the seller slyly revokes his mock-offer. This way the mock-buyer can learn the seller's intentions without paying for the information. It is like a cad offering marriage to learn of the lady's true emotions, then revoking the offer once she reveals them, in order to take advantage of her.

"It is the same here. The act of cancelling a firm bid without buying, after learning of an offer, is simply electronic welching that enables the cad to take advantage of the unlawfully-gained information and front run the victim. All this is made possible by the sequence of signals needed to do a trade.

"Are new laws needed to stop this practice?

"Not at all. The laws already exist to prevent welching, whether done in person or via an electronic agent, and to prevent front running: The law that makes electronic signature legally binding should simply be enforced. The very request of an offer-- the inquiry whether the lady accepts a marriage offer-- should be made firm. Not *would* she accept if she *were* asked, but *does* she accept because she *is* asked. Simple."