Published On: Tue, Jan 15th, 2013

Should Orders Have a Mandatory Resting Period?

Question:
Should Orders Have a Mandatory Resting Period?
Purpose:
Much debate about the evils of HFT and its containment. The issue here is that regulators aren’t equipped to police these type of traders and they believe the fix is to just slow them down by introducing a mandatory resting period. Here is what you said.
Results:
Should Orders Have a Mandatory Resting Period?

Should Orders Have a Mandatory Resting Period?

Analysis:
As Asian regulators embrace more competitive and open capital markets they often look to the West for best practices to address exploitative behaviour amongst participants. The technology-driven high-frequency trader (HFT) as often reported by an uninformed media is portrayed as a predator and detrimental to the evolving market structure now accelerating in Asia. One of the ways poorly resourced and misinformed regulatory bodies are trying to stifle HFT players is the introduction of a minimum resting period for orders sent to a central order book. In the MiFID II review a 500 millisecond resting time for open orders has been approved but does such an arbitrary amount of time make sense?

We conducted a poll at the Asia Etrading website asking; “Should orders have a mandatory resting period?”, replacing the roundly condemned 500 millisecond period for a slightly more business friendly 500 microseconds. As you can see by the results only one third of respondents thought there should be a mandatory resting period with 20% saying 500 microseconds made sense. We suspect that they were influenced by media reports around the MiFID review and hence the higher number that voted. An almost equal number of respondents 20.69% were Unsure and needing more information and 10.34% saying Maybe couldn’t decide if mandatory resting periods for orders made sense. Fair enough. More research and study of the ramifications of such a broad market structure change is prudent.

Lastly, just over one third said they should never have a mandatory resting period. We are inclined to agree with this as it seems regulators are putting a band aid over their own problem of not having the tools to monitor the market, rather than finding a cure.

Certainly HFT is capable of diminishing market quality and no doubt that there are a few bad apples doing just that. We do not think a blanket and arbitrary resting period addresses predatory behaviour and poor liquidity but only places another tax on electronic trading participants and those adding value to market structure. How much did Bernie Madoff cost the industry? I don’t believe he even knew what an algo was yet he got away with it.

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