SEC Seeks To Ban Flash Orders
CORRECTION TO THIS ARTICLE: Because of an erroneous headline provided by the New York Times News Service, a headline in the World and Nation section of Friday’s Tech, "SEC Seeks To Ban High-Frequency Trading," incorrectly summarized the article that accompanied it. The article was about the Securities and Exchange Commission seeking to ban flash orders, a practice often associated with high-frequency trading, not high-frequency trading in general. The headline has been revised to reflect this correction.
It is an obscure art of Wall Street, a technique that gives a scattering of traders an edge over everyone else and the Securities and Exchange Commission wants to stamp it out.
The SEC on Thursday proposed to ban what are known as flash orders, which use powerful computers to glimpse at investors’ orders. The practice is often associated with a controversial corner of finance called high-frequency trading, which has grown, largely hidden from view, into a potent force in the markets.
The proposed ban was announced on the same day that the SEC put forward new rules for credit ratings agencies, which were widely criticized for their role in the financial crisis. Together, the moves telegraphed a tougher line from the SEC after series of prominent missteps, including its failure to spot the Ponzi scheme orchestrated by Bernard Madoff.
Critics say that flash orders favor sophisticated, fast-moving traders at the expense of slower market participants. Using lightening-quick computers, high-frequency traders often issue and then cancel orders almost simultaneously and get an early peek at how others are trading.
SEC Chairwoman Mary Schapiro said Thursday that in proposing the ban, the commission was trying to balance the often competing interests of long-term investors and short-term traders. The proposal requires a second vote by the commission to become binding.
“Flash orders may create a two-tiered market by allowing only selected participants to access information about the best available prices for listed securities,” she said during a meeting in Washington. Other modern market practices, she said, are similarly opaque.
Fast-moving electronic exchanges have upended old-fashioned stock trading. Buyers and sellers no longer must interact on exchange floors and haggle over prices. Today, traders employ powerful computer programs to execute millions of orders a second and scan dozens marketplaces simultaneously.
While anyone can gain access to flash orders for a fee, only very powerful computers can process and act on the information. In July, flash orders represented 2.8 percent of the roughly 9 billion shares of stocks traded in the United States.
According to Richard H. Repetto, an analyst at Sandler O’Neill who studies stock exchanges, the average trade is executed, or completed, in less than 10 milliseconds and often as fast as 5 milliseconds.
The proliferation of high-frequency trading has pushed up average daily volume on the nation’s stock exchanges by 164 percent since 2005. Proponents of the practice argue such trading enhances the liquidity and greases the wheels of the markets.
“High-frequency trading has made the markets more efficient, and generally speaking, markets that are more efficient are better for all participants,” said Justin Schack, a vice president at Rosenblatt Securities.
Even so, Schack said he was pleased the SEC was moving to ban flash orders, which he said tended to “benefit everyone except for the customer.”
Direct Edge, an electronic exchange, has benefited the most from the use of flash orders, analysts said. But other electronic exchanges, including Nasdaq and BATS also jumped into the market, prodded by competitive pressures.