Intercontinental Exchange's Year One High Frequency Trading Results

Posted March 2nd, 2012 by The Options Insider in Industry

This week, the Intercontinental Exchange announced the impact of its year-old high frequency trading messaging policy. The results were positive, showing this innovative method is an effective one.

In a company press release, Chuck Vice, ICE President and COO said,"HFTs are an essential source of liquidity in our markets and often provide price discovery where other traders may be reluctant to do so. These traders represent the natural evolution of the long-standing market-making role as trading overwhelmingly shifted to electronic venues in the last two decades. ICE believes that it is incumbent upon exchanges to adopt rules and design controls that effectively address the existence of high frequency trading within the context of market structure."

So what is ICE's high frequency messaging policy? The exchange implemented this in early 2011 for its most actively traded futures and OTC contracts. The policy was itended to discourage inefficient and excessive messaging without compromising market liquidity, according to the exchange.

Mark Wassersug, ICE's Vice President of Operations explained,"Before 2011, ICE's messaging policy, like many other exchanges, was a simple order-to-trade ratio with published benchmarks above which high frequency traders were assessed a fee. However, this simplistic approach didn't differentiate between orders that 'added to liquidity' and those that were far out of the market. Our HFT Messaging Policy directly addressed this problem by overweighting orders far away from the market relative to those orders near the best bid or offer at the time of entry. The ratio of orders using the weighting scale to lots traded is called the Weighted Volume Ratio (WVR). Traders exceeding our WVR benchmark incur a fee and fees increase as higher WVR thresholds are exceeded. This framework has been extremely successful in managing the
high frequency traders in our markets."

ICE presented the following results from the policy's first year.

The exchange noted that since the policy's introduction, the WVR has declined by 63 percent in ICE Futures U.S. markets, 19 percent in ICE Futures Europe markets, and 53 percent in ICE's OTC markets.
The number of violations from the High Frequency Messaging Policy's highest thresholds declined by 93 percent.
With the policy's implementation, HFTs made improvements to their algorithms and subsequently the quality of streamed orders improved.

Showing its support to ICE's HFT messaging policy, the International Organization of Securities Commissions, the FIA Principal Traders Group, an affiliate of the Futures Industry Association that represents firms that trade with their own capital, wrote the following in a comment letter:

"The truly creative part of this solution is that ICE assigns a weighting scale based on the message's price level relative to the current best bid and offer.By imposing the WVR, ICE has simultaneously incentivized firms to submit orders that are likely to be filled while penalizing firms that submit orders that are unlikely to be filled."

On a final note, ICE commented on the importance of high frequency trading on the markets.

Vice said, "Unfortunately, high frequency trading is not well understood and, as a result, is often blamed, in absence of facts and analysis, for a multitude of market problems, whether real or perceived. Increasingly, policymakers and observers are proposing drastic and untested measures, such as fees for unfilled orders, which could arbitrarily limit trading activity. The likely result would be impaired liquidity leading to increased hedging costs for commercial end users. Instead, ICE hopes to continue developing sound policies for all market participants, including HFTs, to maintain and grow confidence in our markets."