US securities regulators have proposed a ban on flash orders, which give some traders a split-second advantage in buying and selling stocks. The Securities and Exchange Commission is seeking to bar exchanges and trading platforms from giving clients access to information about stock orders a fraction of a second before the market. Critics say the practice gives an unfair advantage to hedge funds and other financial institutions that have lightning-fast computer trading software.
The Nasdaq Stock Market, operated by Nasdaq OMX, and privately held BATS Exchange recently cancelled their flash services that disclosed buy and sell orders to specific trading firms before sending them to the wider market. NYSE Euronext's New York Stock Exchange did not adopt the flashes under scrutiny but the major alternative venue Direct Edge still offers flashes. The SEC will put its proposal, made on Thursday, out for public comment for 60 days, and will schedule a meeting to decide whether to adopt the proposal.
The agency said it would seek feedback on the cost and benefits of the proposed ban, and whether the use of flash orders in options markets should be evaluated differently from those in equity markets. The agency also tightened rules on credit rating agencies by imposing more disclosure requirements and encouraging unsolicited ratings. Those moves, and others proposed by the SEC, took aim at an industry widely criticised as having fuelled the financial crisis through over-generous ratings assigned to toxic mortgage-backed securities.
The proposed ban on flash orders is part of a broader effort by the SEC to clamp down on obscure corners of the US stock market. The SEC chairman, Mary Schapiro, said the agency would keep reviewing trading practices that may give an unfair advantage to some market players. "Investors that have access only to information displayed as public quotes may be harmed if market participants are able to flash orders and avoid the need to make the orders publicly available," said Ms Schapiro.
Supporters of high-frequency trading practices such as flash trading say they add needed liquidity to the markets, and allowed the markets to function smoothly during the financial crisis. But critics, including some politicians, say the markets need to be better policed so all investors are operating on an even playing field. In July, Senator Charles Schumer, a New York Democrat, told the SEC to curb flash trading and threatened the agency with legislation if it failed to do so.
Mr Schumer said flash trading could seriously undermine fairness and transparency in markets. "This ban, as proposed, is pretty much watertight and should not be weakened by the commission as the rule-making process goes forward.".. Joe Mecane, NYSE Euronext's executive vice president of US markets, said flashes were "a relatively small debate that evolved into a very large debate". At most, flashes represented less than 3 per cent of US equity trading volume. All five SEC commissioners voted to propose the flash trading ban, but some were cautious about overreaching in reviewing other market practices.
Troy Paredes, a Republican commissioner, said investors ultimately benefit from regulatory restraint. "Exchanges and other trading venues need flexibility to innovate new products, services and trading opportunities," he said. * with Reuters, Bloomberg