A nuanced idea for a cancelled quote tax

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One of most talked about idea for reducing high-frequency trading-induced volatility is a tax on cancelled quotes.

I think it's doubtful that such a tax will ever be imposed. It seems less likely than a tax on actual transactions, an idea that seems to have been taken more seriously, especially in Europe. But one consultant thinks that a tax on cancelled quotes would not make a significant impact.

"You would have to tax all aspects of the system, such as quotes, cancellations and all equally. The idea of a token tax would reduce liquidity but keep fragmentation high. You need to have costs for accessing the system. If you were to put in a charge for every time you access the system - whether it's a quote, an ask, a market order, or a cancellation - that would eliminate these patterns of behavior in the charts I sent over. You have to have a right cost and not a tax that would have an adverse affect," as noted in a Q&A in Advanced Trading.

This is an interested proposal, but the idea of an access tax is even less likely to catch on. What strikes me as a much more promising idea are the incentives that exchanges--Direct Edge and Nasdaq OMX, for example--are starting to offer that would reduce excessive quoting. The exchange industry is certainly right to offer up some solutions before the politicians get overly involved.

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