NASDAQ backs ban on “flash” orders – U.S. Senate critic Schumer

By Reuters Staff
July 28, 2009

Nasdaq backs ban on ‘flash’ trading -Schumer
By Rachelle Younglai and Jonathan Spicer
WASHINGTON/NEW YORK, July 28 (Reuters) – The Nasdaq Stock Market supports a ban on so-called “flashes,” order types that it and other stock-trading venues send to a select group of traders fractions of a second before revealing them publicly, Senator Charles Schumer said on Tuesday.

The New York Democrat, who has urged the U.S. Securities and Exchange Commission to clamp down on the practice, said parent company Nasdaq OMX is willing to submit to a potential ban by the agency after it “reluctantly” started offering flashes early last month.

Schumer said in a statement he discussed the controversial issue — which has implications for fair prices and the way orders circulate through increasingly electronic markets — in a personal call with Nasdaq CEO Robert Greifeld.

A Nasdaq spokeswoman said the exchange had no comment beyond a letter Greifeld sent to the SEC on Monday, in which he called for the elimination of “any order types or market structure policies that do not contribute to public price formation and market transparency.”

Greifeld’s letter listed “flash orders, internalized orders, enhanced liquidity providers, Block Talk orders, and dark pools,” as order types that do not support price formation.

Nasdaq and rival BATS Exchange started on June 3 “flashing” buy and sell orders to exchange members, including big banks and hedge funds — closely mirroring a service offered by alternative venue Direct Edge, which long offered the service to a smaller group of market participants, and was growing its market share at the exchanges’ expense.

The SEC has not proposed a rule to ban the flashes, optional services that alert computer-trading programs to the intentions of investors. Flashes are also available in some anonymous trading venues known as dark pools.

The agency is examining the flash orders to ensure best execution. It is also examining what regulatory actions may be needed to respond to the potential investor protection concerns raised by the dark pools.

It is not known whether the SEC will propose a ban on such trades.

“We cannot allow our marketplaces to enter a race to the bottom that caters to certain traders at the expense of other investors,” Schumer said in the statement.

Direct Edge has defended flashes as a way for investors to tap into liquidity that they otherwise would not have access to, and as the natural progression of competition among venues in increasingly electronic markets.

BATS said July 7 it supported a review of flashes, raising the possibility that they create a “two-tiered market.”

NYSE Euronext, which runs the New York Stock Exchange and handles the most U.S. equity volume, does not offer flashes and has criticized the practice.

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