NEW YORK, Feb 29 (Reuters) - IntercontinentalExchange said on Wednesday its efforts to curb erratic high frequency trades (HFT) that cause massive volatility in commodity markets have cut excessive out-of-market orders in the first full year since implementing a new policy.
The ratio of orders that were far from market value has fallen by 63 percent in the U.S. futures market and 19 percent in Europe, the Atlanta-based exchange said on Wednesday.
It said the number of violations of the highest thresholds of this new policy, which charged traders a higher fee for trades further away from the current market value, dropped by 93 percent.
In addition, high frequency traders have made improvements to their algorithms and the quality of streamed orders in response to implementation of the policy, it said.
ICE's high frequency trader messaging policy, aimed at discouraging inefficient and excessive messaging without compromising market liquidity, targeted its most heavily traded futures and over-the-counter (OTC) contracts.
High frequency traders are sometimes blamed for causing extreme and fast market moves without fundamental reasons, particularly in small agricultural futures markets. Still, the exchange has consistently said high frequency trades provide essential market liquidity.
"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," said Mark Wassersug, vice-president of operations, in an exchange notice.
"However, this simplistic approach didn't differentiate between orders that 'added to liquidity' and those that were far out of the market."
The policy overweights orders far away from the market relative to those orders that are near the best bid or offer when it is entered.
This ratio of orders using the weighting scale to lots traded is called the weighted volume ratio (WVR). Market participants who exceed this WVR benchmark are charged a fee, and the fees increase as higher WVR thresholds are exceeded.
"This framework has been extremely successful in managing the high frequency traders in our markets," Wassersug said.
ICE's policy came amid mounting pressure for futures exchanges to introduce measures to prevent wild intraday swings, so-called flash crashes, in commodity markets.
Last March, the small ICE cocoa futures market sank $450 in 60 seconds before rebounding a whopping $349 a minute later, with many suspecting computer-generated dealings. The exchange canceled some trades as traditional players complained of market distortion.
ICE, which is a major operator of futures exchanges, clearing houses and OTC markets, believes its weighted scale helps to curb such distortions while maintaining much-need liquidity from this active community of traders.
Increased regulatory oversight, including fees for unfilled orders as mooted by policymakers, would be drastic and could arbitrarily limit trading activity, ICE warned on Wednesday.
"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," said Chuck Vice, ICE president and chief operating officer, in the statement.