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July 6, 2009

Flash Point

By Nina Mehta

Direct Edge was not the first equities market to think up a flash order. The progenitor of the flash among equities markets is the CBSX, which launched in March 2007 as a Regulation NMS-compliant market. This is significant because NYSE Euronext argues that flash orders run afoul of Rules 602 and 604 of Reg NMS. Rule 602, the Quote Rule, requires market centers to publicly disseminate their best bids and offers, and Rule 604 requires customer limit orders to be publicly displayed. The three other markets with flash or step-up orders have all referenced, in public comments or rule filings, CBSX's flash functionality as the basis for their order types.

The CBSX, however, distances itself from the current battle over flash orders. "It's not our fight," said David Harris, CEO of the exchange. His exchange's reason for the flash is different, he said. He also noted that CBSX's flash is an "operational process" approved by the SEC and not an order type.

CBSX developed its flash functionality so its Chicago-based participants could potentially get quicker executions from Chicago-based flash responders and avoid having their order routed 712 miles east for a fill. The exchange's flash process was approved in early September 2006 as part of the rule set for the STOC system, the CBOE's small facility to execute securities that were not options. (The initial rule filing for stock trading was submitted to the SEC in 2004.) Rules making STOC NMS-compliant were approved in late September 2006, and the CBSX, which replaced STOC, got the SEC's nod in March 2007.

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