
China and Clinton Agree: Traders Should Pay for Canceled Orders - jonbaer
http://www.bloomberg.com/politics/articles/2015-12-30/china-and-clinton-agree-traders-should-pay-for-canceled-orders
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tptacek
This seems crazy.

The basic operation of a market maker is to quote both sides of the market,
the bid and the ask, so that people can buy or sell "at the market" quickly,
without rolling the dice on the appearance of a counterparty with a long or
short interest at that exact moment and price. To do that, market makers have
to constantly adjust their prices. Part of the premise of a market maker is
that they don't hold inventory (and thus a long-term position on the
instrument they're trading).

The way electronic market makers adjust prices is by canceling and replacing
their orders (the "UPDATE" command in FIX is literally "Cancel And Replace").

How do you penalize cancels without forcing MMs to drive spreads wider to
account for their costs?

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kasey_junk
A couple of small nitpicks:

1) lots of market makers hold inventory now. Its a very low margin business
these days & folks are looking for any edge. Inventory management & carry risk
management is one place people can compete on.

2) while you are right about the FIX naming for updates, how they are
implemented is entirely exchange specific. Some are truly atomic, some aren't
at all & some are only for lowering we qty of an order. A fairly common task
for an HFT programmer is to make an abstraction that does the _right_ thing
for updates across exchanges.

Finally, I think a cancel tax is stupid & largely shows a lack of
understanding of markets by the people proposing it, but I don't think it will
have much of an effect one way or the other on the markets.

I'd say it swings the markets more in favor of the big market makers at the
expense of the small ones, but the industry has already largely consolidated
so it probably doesn't matter.

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tptacek
Is that because larger MMs will just eat the fees?

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kasey_junk
Yes, its an economy of scale thing. A %5 profit margin decrease will kill some
small market makers (or at least make them move to other venues/trades) but
the big ones have seen their profits erode so dramatically already they have
become much like utilities or gone out of business.

