One of the largest benefits electronic trading has brought to markets is transparency in pricing. Never before have so many firms been able to provide liquidity to investors in real time, thanks to high-frequency trading techniques.
In order to provide this service, these firms must constantly update their prices to keep pace with changing market conditions, meaning that a firm cancels an existing order at an old, stale price and resubmits a new order at a new, current price. A common misperception of electronic trading is that high cancel rates imply bad behavior. In reality, cancellations are nothing more than the price change that occurs when market participants react in real time to updates in the data their models are based on.
[Related: “Fact vs. Fiction: Defining the HFT Debate”]
As the markets have become increasingly electronic, they’ve become more efficient than ever before at reflecting the impact of many different data sources affecting market prices. Professional middlemen such as market makers and HFT firms take in many different data sets and apply many different strategies to create the fairest pricing possible.