SEC Ropes Flash Orders Into Dark Review
Traders Magazine Online News, July 31, 2009
Following a storm of political and media controversy around flash orders, the Securities and Exchange Commission said it is including flash orders in the broader review of dark orders it is undertaking. The SEC is already looking at the potential impact of non-displayed liquidity on market quality and price discovery.
"As she announced in a June 18 speech, Chairman [Mary] Schapiro has directed staff to conduct an overall examination of dark pools," SEC spokesman John Nester told Traders Magazine yesterday. "This review includes looking into flash orders by exchanges and automatic trading systems that disseminate information to select market participants, potentially disadvantaging other investors. The SEC staff is specifically examining flash orders to ensure best execution and fair access to information for all investors."
The discussion about whether flash orders should continue to be allowed, and whether they create a two-tiered system in which some market participants can access information about flashed orders that others cannot see, has led to speculation that the SEC could nix these order types. However, several trading industry executives told Traders Magazine they doubted this was likely in the coming weeks.
The four market centers that offer flash order types are Nasdaq, BATS Exchange, Direct Edge and the CBOE Stock Exchange. In June, Direct Edge's Enhanced Liquidity Provider (flash) program accounted for 1.45 percentage points of market share. The ECN's overall share of matched volume was 11.89 percent. BATS's June market share was 10.72 percent, while 1.25 points came from its BOLT, or flash, executions. Information about Nasdaq's and CBSX's flash executions was not available.
The New York Stock Exchange, which, since May, has been the loudest critic of flash orders, has called for a ban on these order types. Robert Greifeld, CEO of Nasdaq OMX Group, said he would agree to a prohibition, according to a statement on Tuesday from New York Senator Charles Schumer's office. Schumer wrote to Chairman Schapiro last Friday, urging her to ban flash orders or else he would introduce legislation to do so.
A Nasdaq spokesman declined to comment on that statement, noting that Greifeld's letter to SEC Chairman Schapiro on Monday "speaks for itself." In that letter, Greifeld told Schapiro that there are "justified concerns over the increased use of 'dark order' types, such as so-called flash orders." He stressed that now is the time "to take a hard look at dark order types and the underlying market structure issues that do not support price formation. These include flash orders, internalized orders, enhanced liquidity providers, Block Talk orders, and dark pools."
Joe Ratterman, CEO of BATS Global Markets, which operates BATS Exchange, said yesterday that his company would agree to a ban based on several "rational" regulatory issues he had raised earlier this month. Direct Edge's CEO, Bill O'Brian, has said he welcomes a review by the SEC of these order types as part of a broader study of dark pools and non-displayed liquidity.
At the same time, the biggest exchanges are now struggling to distinguish several trading issues that have been conflated by media reports. Ratterman, in an email newsletter sent yesterday to reporters and firms in the trading industry, noted that the mechanics of flash orders and how they're used have been misrepresented.
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