SEC Will Ban Flash Trading

Aug 5 2009 | 10:15am ET

The Securities and Exchange Commission is poised to ban flash-trades, a practice that may give some traders an unfair peek at the competition.

Sen. Charles Schumer, who last month demanded that the agency move on flash traders, said SEC Chairman Mary Schapiro assured him that the regulator will bar the practice. For her part, Schapiro acknowledged in a press release that she has commissioned draft rules to “quickly eliminate the inequity” cause by flash orders.

Flash orders, which give trades a split-second peak at other orders, were approved by the SEC in 2004, when it gave the thumbs up to systems at the Boston Options Exchange. Since then, it has proliferated; NYSE Euronext is the only one of the top four exchanges in the U.S. that doesn’t use flash orders. NYSE has said the practice actually gets customers a worse price, a contention backed up by Morgan Stanley and Getco.

Schapiro said that banning flash trades will take some time, including a pair of votes by the SEC and a 30 to 90 day public comment period.

Recently, flash trading has been in the news, where some reports have made it synonymous with high frequency trading. However, only a very small percentage of high frequency traders utilize flash trading. 

"High-frequency trading has little to do with flash orders," says Irene Aldridge, author of High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems. "Key high-frequency trading strategies deploy PhD-level game theory and econometrics, honest skill and hard work, and do not rely on questionable market tactics. The high-frequency trading community works hard to establish price discovery and maintain liquidity accessible to both institutional and retail investors alike."


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