The Securities and Exchange Commission (SEC) chairwoman Mary Schapiro announced last week her push to eliminate “Flash Orders” as part of a broader investigation into High Frequency Trading and it’s impact on the markets.
“Flash Orders” are Immediate or Cancel Orders (IOC’s) placed into a market (such as NASDAQ or BATS Exchange) which are displayed to a subset of market participants for 30ms (or there about) before being routed to the full market. At first glance, this seems like an unfair advantage given to this subset of participants, however with little effort and investigation (which it seems the SEC didn’t bother with) you find that it’s completely within the ability of market participant to join this group and be able to receive these “Flash Orders.”
What is even more disturbing about the SEC concern is the similarity of these “Flash Orders” to an extremely common practice in the trading pits of the traditional floor based stock exchanges. In these pits, brokers regularly give each other the opportunity to trade directly amongst themselves before routing their orders to the markets as a whole. When done to allow a trade to go up in front of a customers order, this is called “Front Running”, when done as a normal course of business, we call this business as usual.
As a result of her statements as well as those of Senator Charles Schumer, both NASDAQ and BATS have announced they will be ending support for “Flash Orders” in the coming weeks. While they may view this as a “win”, I see this as the start of a slippery slope into the the over regulation of our financial markets. On top of their review of “Flash Orders”, they are looking at the practices of High Frequency Trading and Collocation of servers close to the electronic exchanges.
Perhaps the SEC should spend it’s time enforcing existing rules and less time investigating irrelevant issues, and perhaps we could prevent the next Madoff.
