CMRC’s study looked at Canada’s recently implemented integrated fee model – which CMCRC calls a “messaging tax” – and found it had coincided with a decline in quote submission, trades, volume and deterioration of liquidity. Messaging taxes have been proposed as a response to the rise of high-frequency trading. The study is of relevance in Australia because the messaging tax model has been adopted in two places – Canada and Australia. “Messaging tax-style regimes have been talked about in various jurisdictions both to quell HFT and to appropriate funds to use for more regulation,” says Mike Aitken, CEO of CMCRC. “The problem is that these proposals haven’t been tested or modeled before being implemented, leaving whole markets open to the law of unintended consequences.” The study, by Alexander Sacco and Andrew Lepone, analysed the raw measures of message traffic, trades and order-to-trade ratio to examine the association between message traffic, trading and liquidity, CMCRC says. The study employed regression analysis to examine the relation between order-to-trade ratio and market quality using a sample of the top 60 stocks for Chi-X Canada from January 2011 to August 2012. The study’s results suggest that the implementation of the integrated fee model resulted in a statistically significant decline in message traffic, trading volume, the order-to-trade ratio measure, the algorithmic trading proxy and liquidity measures. Canada’s market regulator, the Investment Industry Regulatory Organization of Canada (IIROC), instituted an integrated fee model in April 2012. The integrated fee model is meant to recover technology costs based on the volume of messages. Australia implemented an integrated fee model on Jan. 1, 2012, which enables the Australian Securities and Investments Commission (ASIC) to recover the funding that had been previously approved to cover ASIC’s additional costs when it took over the market supervisory responsibilities previously conducted by ASX and the introduction of Chi-X Australia as a second exchange. ASIC was given authority to recover from ASX and Chi-X Australia AU$22.81 million in additional supervisory costs from Jan. 1, 2012, to June 30, 2013. The costs were proportionally allocated to each participant thusly: the AU$14.92 million in non-IT costs are proportionally allocated based on the number of transactions, and IT costs of AU$7.89 million are proportionally allocated based on the scale of message traffic, according to the legislation and the article. Integrated fee models are criticised because they have an apparent bias against high-frequency trading and high message traffic. “Many studies from all around the world have concluded that algorithmic and high-frequency trading add liquidity to markets and make them more efficient,” Aitken says. “So it makes sense that anything that acts to reduce that activity would decrease liquidity. “Policy makers around the world recognise the benefits of encouraging efficiency proxied by liquidity, and legislate broad policy objectives accordingly. Our research shows that implementing messaging taxes inhibits these macro policy objectives and suggests that the imposition of messaging taxes is a retrograde step, damaging to market quality.”