Flash Schumer scores a victory–almost

August 4, 2009

It appears Senator Chuck Schumer, aka Flash Gordon ,is going to get his way on the dubious practice of “flash trades.” Maybe.

Schumer says the Securities Exchange Commission has told him it is close to banning flash trades–a process in which some high-frequency trading desks get a few millisecond sneak peak at market trade orders. This practice has fueled allegations that some high-frequency trading desks are getting an unfair advantage and can frontrun the general market.

Actually, the SEC isn’t quite ready to that, although the commission appears to be moving towards a ban on most, if not, all flash trades. (See statement below).

A ban on flash trades would be a good thing. But it’s still not clear how widespread the practice is.

And, as I’ve said many times before, this is the least serious issue when it comes to the matter of high-frequency trading.

I’m still waiting for Flash Schumer or SEC Chairwoman Mary Schapiro to come straight out and say they are worried about the possibility of HFT sparking a 1987-style meltdown.

A ban on flash trades is nothing more than going after the low-hanging fruit. If the SEC simply stops there it simply hasn’t done its job of protecting investors from a potential HFT-sparked market meltdown in the Wall Street matrix.

UPDATE: Here’s Schapiro’s statement on flash trades. Note there’s no direction mention of HFT in this statement, leading me to believe this review may not be as sweeping as many, including myself, would like.

I am concerned about the issues presented by dark pools as well as flash orders. Earlier this year, I asked the SEC staff to conduct an examination of dark pools. This included a review of flash orders by exchanges and electronic trading systems. Since the review was undertaken, I have asked  the staff for an approach that can be quickly implemented to elimnate the inequity that results from flash orders. Under the rule-making process, such a proposal to eliminate the ability to flash orders would need to be approved by the Comissission and be open to public comment.

UPDATE 2.0: An SEC spokesman tells me “HFT (is) being looked at generally.” But, at this point, the SEC is not looking at eliminating it.

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I would like to respectfully submit that a COMSEC audit at the NYSE would do more than just about anything else to throw some light on the more interesting critters in this story. I’m indebted to an anonymous blogger for pointing at a WSJ story detailing the resignation yesterday of Obama’s top cybersecurity czar, and trying to connect the dots back to Aleynikov and HFT.

“Does Goldman Sachs not want the Feds to see their data flows, and if so, why?” ( http://www.correntewire.com/goldman_sach s_doesnt_want_federal_officials_see_thei r_data_flows ), Corrente, August 4, 2009.

“Security Cyber Czar Steps Down”, ( http://online.wsj.com/article/SB12493248 0886002237.html ) by Siohban, Gorman, Wall Street Journal, August 4, 2009.

[...] Flash Schumer takes on high-frequency trading, and meanwhile, Nasdaq and BATS clean it out of their own belfry. We really do owe HFT better [...]