SEC set to target flash trading

The US Securities and Exchange Commission is preparing to clamp down on lightning-fast “flash” trades made on electronic trading systems amid growing concerns that the practice puts some investors at a disadvantage.

Mary Schapiro, SEC chairman, said on Tuesday that she had instructed her staff to find “an approach that can be quickly implemented to eliminate the inequity that results from flash orders”.

The SEC has been looking into flash orders – in which some exchanges allow traders a look at share order flows a fraction of a second before the broader market – as part of a review of so-called “dark pools”, anonymous electronic trading venues that do not display public quotes for stocks. Ms Schapiro’s statement underscores the agency’s intention to respond quickly to market concerns.

Flash orders have stoked the ire of some lawmakers, including New York Senator Charles Schumer, who last month started urging the SEC to ban the practice altogether. Mr Schumer said on Tuesday that Ms Schapiro had personally assured him that the agency plans to put a ban in place.

“It is also important to make sure flash orders aren’t just the tip of an iceberg lurking in the dark reaches of the market,” he said. “There is a lot of mystery about what goes on in dark pools and in the realm of high-frequency trading generally.”

Any proposals involving flash orders would have to approved by the full commission and be open to public comment.

Flash orders are not endorsed by NYSE Euronext, whose share price rose nearly 4 per cent after the SEC statement was issued. But rival Nasdaq OMX – whose share price briefly dropped some 3 per cent before recovering yesterday – and other trading venues such as BATS and Direct Edge use them in order to compete for market share.

The use of flash orders is not confined to high frequency traders. Retail brokers, institutional investors, proprietary trading firms and automated market makers also use flash orders.

Some traders say that when Direct Edge started offering flash orders three years ago, the practice was not controversial. But as Direct Edge’s market share has grown, complaints have emerged. Direct Edge’s market share of daily volume has jumped to 12 per cent from around 1.5 per cent in the past two years.