SEC takes steps to ban 'flash' trading

Practice gives unfair advantage to some bigger financial companies, critic says

The Securities and Exchange Commission is seeking to ban the practice of "flash" trading, where some large financial companies get access to stock trading information milliseconds before that information is made available to the trading public.

The traders then use superfast computers to trade ahead of pending buy and sell orders to gain what is seen by some as an unfair advantage on other traders.

Saying she was "concerned" by the issues presented by the use of flash orders by stock exchanges and electronic trading systems, SEC Chairwoman Mary Schapiro ordered a review of the practice earlier this year.

"Since that review was undertaken, I have asked the staff for an approach that can be quickly implemented to eliminate the inequity that results from flash orders," Schapiro said in a statement. Such a proposal would first need to be approved by the full commission and be open to public comment, she said.

Schapiro's order comes in the wake of concerns over flash trading that were expressed recently by U.S. Sen. Charles Schumer (D-NY). In a letter addressed to Schapiro dated July 24, Schumer urged the SEC chairwoman to ban the practice because of the unfair advantage it gave to larger brokers.

"This kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system where a privileged group of insiders receives preferential treatment," Schumer wrote. The practice deprives others of a "fair price" for their transactions, and threatens to "undermine the confidence of ordinary investors" he wrote.

If the SEC fails to ban the practice, Schumer said he would introduce legislation in the Senate to prohibit flash trading.

Schumer added that he welcomed Schapiro's decision. "The agency is absolutely making the right call by stepping up and ending this unfair practice," Schumer said in a statement today.

Flash orders are offered by a number of stock exchanges, including the Nasdaq, Jersey City-based DirectEdge and BATS Exchanges Inc. of Kansas City. For a fee, these exchanges flash, or make available, information about buy and sell orders a few milliseconds before the one-second limit by which that the information is supposed to become publicly available under current SEC Regulation National Market System regulations.

In his letter to Schapiro, Schumer said the practice is believed responsible for increasing the volatility on U.S. stock exchanges and in 2008 accounted for $21 billion in profits to those taking advantage of it.

Copyright © 2009 IDG Communications, Inc.

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