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September 9, 2009

Institutional Brokers Steer Clear

By Nina Mehta

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The now-notorious flash order appears to be on the verge of extinction. In the space of two weeks, one U.S. senator, the chairman of the Securities and Exchange Commission, and three suppliers of flash order types either excoriated the trading practice or distanced themselves from it.

Sen. Charles Schumer

First, Senator Charles Schumer, the powerful Senate Banking Committee member, vilified flash orders in a letter to SEC Chairman Mary Schapiro. Then Schapiro herself ordered her staff to develop a proposal that would "eliminate the inequity that results from flash orders." Then both BATS Exchange and Nasdaq OMX Group announced they would eliminate their flash order types. Finally, even Direct Edge ECN, the poster child for flash orders, scuttled plans to introduce a new one.

So the order type offered by four market centers and a significant driver for Direct Edge may be on the way out. Yet even if flash orders are not outlawed, institutional brokers tell Traders Magazine they don't use them.

"We don't flash," said Dan Mathisson, head of the Advanced Execution Services group at Credit Suisse. "The whole reason we exist is to try to execute [institutional orders] while leaking the smallest possible amount of information. Flashing orders is not consistent with that overall strategy." Credit Suisse said it does not send routable orders from its AES unit to market centers, and therefore doesn't use flash orders.

Greg Tusar, head of U.S. electronic trading at Goldman Sachs Execution & Clearing, said his firm does not use flash orders from any of the four venues that offer them. "We don't use them in the execution of client orders," Tusar said. "But we believe it should be a matter of choice-that clients should have access to them if they choose to. They should be available on an opt-in basis, client by client."

"Flash orders have the potential to cause information leakage," said Jatin Suryawanshi, head of global quantitative strategies at Jefferies & Company. "It's information that was not available on a data feed that's now available on a data feed." He added that the use of flash orders, if it's not done purposefully to aggressively take liquidity, may fly in the face of a broker's best-execution duties.