The Nasdaq, BX and PSX exchanges will each introduce an "Excessive Messaging Policy", that will become effective Friday, 6/1/12 - pending filing with the SEC.  The exchanges have explained why they're introducing the policy and how the policy will operate. Purpose of an Excessive Messaging Policy. Notwithstanding the need for "robust liquidity provision, including depth of liquidity, excessive quoting at prices away from the NBBO can result in a significant market data burden for participants and does little to improve the quality of the marketplace. The Nasdaq and affiliated exchanges, in proposing an Excessive Messaging Policy that encourages active quoting near the NBBO while discouraging excessive order activity away from the inside, seek to reduce non-marketable quote activity while protecting legitimate market making activity from incremental complexity and cost. The Excessive Messaging Policy. As noted above, the policy is set to go into effect on 6/1/12.  MPIDs that exceed a "Weighted Order-to-Trade Ratio" of 100:1 will pay a fee on the orders that cause them to exceed the threshold.   Order and trade activity by Registered Market Makers in their registered securities will be excluded from the ratio calculation. The Weighted Order-to-Trade Ratio is a measure of how often an MPID sends displayed, non-marketable liquidity-providing orders to the exchange that fail to execute.  It's similar to the "Orders to Orders Executed" ratio used by Nasdaq's ISP program, but also applies a Weighting Factor to each order based on its proximity to the NBBO at the time of entry.  The proposed weighting factors for an order's price vs. NBBO upon entry are:  

• At the NBBO  -  0 times.
• < 0.50% away  -  1 times.
• 0.50% to 1.99% away - 2 times.
• 2.% or more away - 3 times.

Impacted Orders. Only displayed, liquidity-providing orders received during regular market hours will be included in the Weighted Order-to-Trade Ratio calculation.  Non-displayed orders, IOC orders and Auction orders will not be included in the calculation.  Orders sent by Registered Market Makers in their registered securities will not be included in the calculation.  MPIDs sending less than one million liquidity-providing orders daily will not incur penalties. Penalties for Excessive Orders. MPIDs that exceed the Weighted Order-to-Trade Ratio threshold of 100:1 will pay a per order penalty for their "Excessive Orders".  Excessive Orders are orders that cause an MPID's ratio to exceed 100:1.

e.g. - ABCD sends the following displayed, liquidity-providing orders:

• 1,000,000 orders at the NBBO (weighting factor: 0x), of which 7,000 trade.
• 500,000 orders 1% away from the NBBO (weighting factor: 2x), of which 1,000 trade.
• ABCD's WO-to-T Ratio is 125:1
• Weighted Order Count: 1,000,000 (1,000,000 x 0 + 500,000 x 2) Orders executed (i.e., Trades): 8,000.
• Therefore, the ratio is 125 = (1,000,000 weighted orders / 8,000 orders executed).
• Based on 8,000 orders executed, ABCD needed a weighted order count of 800,000 orders to meet the 100:1 threshold.
• Therefore, the Excessive Order quantity is: 200,000 = (1,000,000 - 800,000).
• ABCD will incur a penalty on their 200,000 excessive orders.
• The penalty rate is expected to be between $0.001 and $0.01 per order, based on the extent to which the MPID exceeds the threshold ratio. Note that less active participants (MPIDs submitting fewer than one million displayed liquidity-providing orders daily) will not incur penalties regardless of their ratio.

For further details, go to:   [Nasdasq Equity Trader Alert 12 - 13, 3/7/12].