Unfair Advantage


This shouldn’t be allowed, period.

SEC Probes Flash Orders to Ensure Fair Access to Data (Update3)

The U.S. Securities and Exchange Commission is examining so-called flash orders to ensure equity markets aren’t putting investors at a disadvantage by giving some brokerages advance knowledge about trades.

“The SEC staff is specifically examining flash orders to ensure best execution and fair access to information for all investors,” John Nester, a spokesman for the regulator, said today.

Charles Schumer, the third-ranking Democrat in the U.S. Senate, told the SEC to review flash orders in a July 24 letter. Nasdaq OMX Group Inc., Bats Global Markets, Direct Edge Holdings LLC and the CBOE Stock Exchange give information to their clients about orders for a fraction of a second before the trades are routed to rival platforms. The systems are meant to give investors an additional opportunity to complete a trade.

Last month, SEC Chairman Mary Schapiro said the agency is concerned that electronic indications of bids and offers are being disseminated to a select group of brokerages. She also said it would examine dark pools, private electronic markets operated by brokerages that don’t publicly post quotes.

The review appears unlikely to lead the SEC to impose curbs on other forms of high-speed trading, NYSE Euronext Chief Executive Officer Duncan Niederauer said today, citing discussions with regulators. NYSE Euronext, the world’s largest owner of stock exchanges, told the SEC in May that flash orders result in most investors getting worse prices.

No Fear

“I don’t think there is any fear of them doing something that would severely damage the displayed liquidity on U.S. equity markets,” he said today in a conference call with analysts to discuss the New York-based company’s second-quarter results. “High-frequency trading is actually the most consistent source of liquidity.”

NYSE is building facilities in Mahwah, New Jersey, and near London to boost its capacity to handle high-speed trades. The company is spending about $500 million, the Wall Street Journal reported today, citing people familiar with the matter.

Analysts including Raymond James Financial Inc.’s Patrick O’Shaughnessy said this week that regulators’ response to flash orders might result in restrictions on computer-driven trading, which could hurt profit for exchanges.

Bats, Nasdaq Support

Bats CEO Joe Ratterman said today in an e-mail to clients that the Kansas City, Missouri-based exchange would support an industrywide ban on flash orders. Nasdaq CEO Robert Greifeld told Schumer July 28 that his company would also support a prohibition, according to a statement issued by the New York senator’s office.

Both introduced the systems over the past three months to compete against Direct Edge, the trading platform that has gained market share through its three-year-old Enhanced Liquidity Provider program.

Direct Edge, which is not a registered SEC exchange, more than doubled its market share since November to 11.9 percent of the total volume in the U.S. in June by using revenue from its ELP program to cut other trading fees. The ELP program accounted for 8 percent of the shares handled by Direct Edge.

“If regulators get rid of it, or do anything to significantly circumscribe the program, it will hurt Direct Edge and help Nasdaq and NYSE,” Justin Schack, vice president of market structure analysis at New York-based Rosenblatt Securities Inc., said in an interview. “It takes away a big competitive weapon that Direct Edge used to gain market share.”

Wall Street and the World of Flash Stock Trades

High Frequency Trading

The computers have become traders in just the last few years, say market people. One particularly visible part of what they do is called High Frequency Trading, in which machines, programmed to look for market trends, may buy or sell a stock in milliseconds.

A subset of this phenomenon is known as “flash trading,” in which stock exchanges let firms place super-fast orders to buy or sell stocks — often based on information they receive a fraction of a second before the rest of the world does. Large firms pay fees for the advance information, and may be able to profit by moving so quickly.

See also:
ICE says it doesn’t allow ‘flash’ trading
Nasdaq backs ban on “flash” trading: Schumer
High-Frequency Trading Faces Challenge From Schumer (Update1)
Schumer wants to ban flash trading
SEC Examines ‘Flash’ Trading
BATS CEO Ratterman supports ban on flashed orders
BATS Exchange Supports Ban On ‘Flash’ Orders – CEO

And people wonder why the average investor distrusts Wall street.

/apparently all trades are equal, but some trades are more equal than others

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