China and Clinton Agree: Traders Should Pay for Canceled Orders
Comment of the Day

December 30 2015

Commentary by Eoin Treacy

China and Clinton Agree: Traders Should Pay for Canceled Orders

This article by Eduard Gismatullin and Sam Mamudi may be of interest to subscribers. Here is a section: 

Other measures suggested by the CSRC include forcing traders who use automated orders to provide a detailed description of their strategies to regulators and wait for a review before they’re allowed to execute trades. That proposal has raised concern among some international investors who don’t want to disclose their proprietary trading algorithms, according to Calvin Tai, the head of global clearing at Hong Kong’s stock exchange.

Clinton, the front-runner to win the Democratic nomination for president, called for a fee on canceled orders in October and explicitly linked the idea to curbing high-frequency traders. Her plan is designed to target “harmful” high-frequency trading that makes markets “less stable and less fair,” Clinton’s campaign said at the time. 

For every 27 orders placed on U.S. stock exchanges, about one is filled, according to data from the U.S. Securities and Exchange Commission. In other words, approximately 96 percent of all orders sent to U.S. equity markets are canceled.

China wouldn’t be unique in trying to limit canceled trades. Traders using Frankfurt-based Deutsche Boerse AG’s stock market are restricted from submitting an excessive amount of orders that don’t get executed. Borsa Italiana has a high-usage surcharge to prevent orders from getting too far out of whack with the number of actual trades.

Eoin Treacy's view

China introducing a fee for cancelled orders will certainly put the brakes on spoofing. Demanding firms submit their strategies to regulators for ‘approval’ before they ever enter the market probably means China’s high frequency trading environment will remain a domestic affair. 

I can’t but think that the introduction of these rules is ironic since high frequency trading is in its infancy in China. The USA needs these types of rules while China needs better protections on insider trading and traditional market manipulation which it has been notably slow in introducing. 

The Shanghai A-Share Index continues to hold a progression of higher reaction lows and has steadied in the region of 3700. A sustained move below 3500 would be required to suggest a lengthier period of support building.  Since 2015 has been one of the most volatile years on record for the Chinese market the administration is probably more inclined to foster a slow and steady pace of advance. The introduction of rules to slow down market participation may potentially be viewed in that context. 

The Hong Kong Hang Seng China Enterprises Index (H-Shares) has been ranging mostly above 9000 since 2011 and needs to hold that area on the current pullback if support building is to continue to be given the benefit of the doubt.


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