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February 18, 2010

Flash Is Dimming at Direct Edge

By Peter Chapman

Flash trading is fading away at Direct Edge and that's a good thing, according to the ECN, which last year endured heavy criticism over its flash trading program.

Direct Edge says the decline in its Enhanced Liquidity Provider (ELP) program, which involves flashing quotes to a select group of traders, is due to the rise in its market share, not because of customers snubbing the service due to the controversy. As more liquidity builds up on its books, more orders get executed and fewer enter the flash process, a Direct Edge spokesperson said.

"More liquidity and a higher match rate on our books means less chance for an ELP execution," the executive said. "Our match rate has soared since March, from 60 percent to over 70 percent. Thus, the drop in ELP is not a surprise."

The dwindling amount of shares through the ELP service was evident in December, when less than 5 percent of Direct Edge's volume was executed that way. That compares to more than 15 percent in December 2008. In absolute terms, Direct Edge executed just 52 million shares via the ELP program in December, down from 169 million in December 2008. The peak was 201 million shares, in March 2009.

Still, the ECN is protesting the SEC's move to ban flash trading. "The positive aspects of flash technology have been understated," Direct Edge told the regulator in a letter, "[and] the concerns have generally been overstated and under-supported." Direct Edge's market share peaked in August at 12.9 percent.

 

 

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