Financial Regulatory Forum

U.S. SEC ban on “flash trading” called imminent

By Reuters Staff
August 4, 2009

U.S. Senator Charles Schumer (file photo)WASHINGTON/NEW YORK, Aug 4 (Reuters) – A U.S. Securities and Exchange Commission ban on so-called flash orders is “imminent,” a senior lawmaker said on Tuesday — just before the agency itself said it was drawing up plans to ban the controversial services offered by some stock exchanges.  Democratic U.S. Senator Charles Schumer said SEC Chairman Mary Schapiro had personally assured him that the agency planned to ban the practice of “flash trading,” which gives advance knowledge of stock orders to certain traders.

“We salute the SEC for moving forward with this ban that will restore integrity to the markets,” Schumer said in a statement.

In a separate statement, Schapiro said she had asked SEC staff for “an approach that can be quickly implemented to eliminate the inequity that results from flash orders,” which she said were a matter of concern.

In June, the Nasdaq Stock Market and BATS Exchange began “flashing” buy and sell orders to their market members — banks, hedge funds and others — before routing them to the rest of the public market. The services were similar to one long offered by alternative rival Direct Edge.

Advocates say flashes, which last for a fraction of a second, add liquidity and improve prices for investors. Critics, including the New York Stock Exchange, say they undermine fair markets at the expense of traders without access to high-speed trading software.

The debate could have implications for the infrastructure of markets that now support some 40 stock trading venues, including many so-called dark pools, where orders are matched anonymously. Flashes show up in some dark pools, which Schapiro also said concerned her.

Schumer said Schapiro had told him in a phone call late on Monday that the ban “would occur as part of a larger look at dark pools and high-frequency trading.”

The senator said the call with Schapiro came in response to a letter he sent last month saying that the SEC should eliminate the practice or else he would offer legislation to do so.

Banning flashes could hurt high-frequency trading firms and funds that use computer algorithms to take advantage of flashes. Nasdaq OMX and BATS last week said they would support a ban on flashes.

((Reporting by Kevin Drawbaugh in Washington and Jonathan Spicer in New York; Editing by Gary Crosse and Lisa Von Ahn))

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