Traders Magazine, July 2009
In Selway's view, this argument clouds the point. The point, he said, is that order messages are being broadcast at prices that, effectively, lock protected quotes. This creates an elite tier of traders with access to better-priced orders than those receiving public quotes through the securities information processors, giving flash recipients an information advantage, he said.
In its letter, SIFMA made a related point. It complained to the SEC that flash orders raise "fair access issues." A two-tiered market, SIFMA wrote, will lead to a playing field in which "some [investors are] able to pay for a non-public direct feed to trade with better-priced quotes versus those quotes that are accessible to the general public." It also said that broker-dealers unable to readily distinguish flash quotes from protected quotes could run into compliance problems with Reg NMS and their best-execution obligations, since those obligations are tied to the official NBBO.
Flash orders could make satisfying best-execution obligations problematic by improperly influencing routing decisions as well. Several broker-dealers told Traders Magazine that the beneficial pricing associated with flash orders creates incentives for brokers to send flow to non-NBBO markets that have flash orders. Firms whose orders are flashed pay a lower liquidity-taker fee for those executions on Direct Edge than they do for regular executions. On Nasdaq and BATS, they get a rebate instead of paying a fee. (CBSX charges the same fee for regular and flash orders.)
Another best-execution issue is that broker-dealers seeking flash executions could miss executions if the NBBO changes during the flash period. Larry Harris, a finance professor at the University of Southern California and a former chief economist at the SEC, notes that exchanges generally are not allowed to trade through better-priced protected quotes, although they can trade at that price. "But the flip side is that the exchange may lose the opportunity to obtain a trade at that price if they hold the order during the flash period," he said. "The person who submitted the order to the flash process takes the risk that the NBBO will change or that no one will respond while the order at the other market disappears."
Christopher Nagy, managing director for order routing, sales and strategy at TD Ameritrade, said his firm's experience with Direct Edge's flash orders has been positive. Ameritrade began using Direct Edge's ELP program when it started in 2006. "We saw that clients were getting great executions on limit orders, and a more consistent execution experience, so we continued utilizing the program," he said.
For investors, Nagy continued, flash orders avoid slippage concerns associated with displayed orders. "Reg NMS doesn't incentivize retail or institutional orders to display their hands for fear of slippage," he said. "If you can enter a transparent environment but essentially be hidden, you're more apt to transact in that world." He added that Ameritrade usually receives better prices than the NBBO on Direct Edge.
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