DMA, shoring up the messaging floodgates

For anyone having doubts that messaging "network strain" is a major concern, this new exchange rule, could be an eye opener.

In essence, the CME's Globex complex, long considered at the cutting edge of electronic-matching-engines, is feeling the strain. A welcome price to pay for the success of the E-mini and other electronic contracts that have been showing steady growth for the past 7 years. The problem stems from the fact that more and more sophisticated front-end trader tools have been written to capitalize on the Globex API and its underlying infrastructure. To this end, the CME is proposing the creation of ratios or messaging-benchmarks that throttle the amount of modification (CFO) and cancellation (CXL) messages as a percent of matched orders. One preliminary example for the E-mini S&P 500, would be a ratio of 10 to 1 (or a limit of 10 CFO and CXL messages for every trade that executes). Values outside of the ratio bounds would incur higher fees (reads penalties). Those will either get swallowed (highly unlikely) by or get passed down by the brokers onto their DMA clients.

Employing similar rules on equity exchanges is most likely being entertained but quite unlikely to see the light. Equity traders engaged in statistical arbitrage, use algorithms that are constantly adjusting their orders for active long/short or pairs-trading strategies. Same goes for most smart-order-routing algos that handle size by seeking liquidity on different venues. In essence, a great deal of trading logic will be adversely impacted by instituting curbs on the number of modification and cancellation messages that one can economically send.

All of this is pointing to the increased cost of maintaining an infrastructure that can keep up with the tide of smarter systems and their aggressively active algos. A problem that will not be going away anytime soon, if anything this is just the tip of the iceberg.