SEC Moves To Ban Freshly Discovered ‘Flash Trading’

August 5, 2009 · Leave a Comment

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(New York Times)

The head of the Securities and Exchange Commission will seek to stop a trading technique that enables some large banks and hedge funds to peek at investors’ stock orders before they are sent to the broader marketplace, Senator Charles E. Schumer said on Tuesday.

Mr. Schumer, Democrat of New York, said in a statement that he was personally promised the regulator would seek to prohibit the technique, known as flash trading or flash orders, by the S.E.C. chairwoman, Mary Schapiro.

The senator had written to Ms. Schapiro last week about flash orders, adding that he intended to introduce legislation blocking the practice if the S.E.C. did not act.

“We salute the S.E.C. for moving forward with this ban that will restore integrity to the markets,” Mr. Schumer said in a statement Tuesday. “The agency is absolutely making the right call by stepping up and ending this unfair practice.”

When buy or sell orders are submitted to marketplaces like Nasdaq, they are sometimes flashed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — before they are routed to everyone else. In that half-second, fast-moving computer software can gain valuable insights regarding growing or declining demand in certain stocks, and can trade ahead of other market participants, pushing prices up or down.

Although anyone can gain access to flash orders by paying a fee, they are useful only to traders who have computers powerful enough to act on the data within milliseconds. In recent years, some of the largest financial companies, including Goldman Sachs, have earned enormous profits with such computers, which are very expensive and often housed right next to the machines that power the marketplaces themselves.

In a statement, Ms. Schapiro said:

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 overall examination of dark pools. This included a review of flash orders by exchanges and electronic trading systems. Flash orders are orders that flash in milliseconds to only a select group of market participants which can disadvantage other investors.Since that review was undertaken, I have asked the staff for an approach that can be quickly implemented to eliminate 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 Commission and be open to public comment.

 

Categories: News
Tagged: ban, flash trading, HFT, high frequency trading, SEC

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