Clinton's proposed tax on HFTs could hurt ETF market
Hillary Clinton's proposed plans to tax "excessive" cancellations of buy and sell orders targeting HFT firms could impact ETFs. Market makers operate to keep the price of ETFs in line with the underlying basket of securities on which they are based, and when an underlying component experiences a change they frequently have to cancel existing bid and offers and replace them with new orders taking the sudden change into account. This results in the cancellation ratio on ETFs being four times greater than that of single stocks. Market observers argue that any potential new tax on trading may result in market makers having to widen their spreads to cover the additional costs.

With Presidential candidates ramping up rhetoric on proposed policy changes, exchange traded fund investors may want to watch for Hillary Clinton’s rise in the polls as the Democratic candidate has proposed reforms to regulate the financial industry

Democratic presidential hopeful Hillary Clinton unveiled new taxes targeting high-frequency traders that some market watchers argue could indirectly raise costs and disrupt the equities market, reports Bradley Hope for the Wall Street Journal.

Specifically, Clinton suggested a tax on “excessive” cancellations of buy and sell orders that could diminish risk-taking and misconduct on Wall Street.

The spike in cancellations by firms has “unnecessarily burdened our markets and enabled unfair and abusive trading,” according to Clinton.

High frequency trades refer to a type of trading strategy utilized by computerized firms that rapidly execute orders on new information or changes in supply and demand for stocks, bonds, futures contracts and other exchange traded securities. The trading activity is done very quickly, with dozens of orders per second at times, and the firms may change orders in a moment’s notice, which include many cancellations.

Increasingly popular ETF trades have experienced more canceled orders than stocks, according to the Securities and Exchange Commission – for every stock traded, about 20 orders are canceled, while every ETF traded, 80 are canceled. ETFs have a higher frequency of canceled orders due to their arbitrage mechanism, which tries to bring in line an ETF’s market price and that of its underlying net asset value.