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Flash Trading

by Michael W. Stocker
Eyes On Wall Street |

How much of an advantage is it to know about trades three hundredths of second before the investing public? Enough to warrant the concern of the SEC. The issue involves flash trading or high-frequency trading, which gives select traders the ability to see buy and sell orders a fraction of a second before the information becomes public. This tiny time advantage can be highly profitable, because high-speed super computers are able to process the flashed information to help investors capitalize on trading patterns that are not yet public information. Mary L. Schapiro, chairwoman of the SEC commented in a September 17, 2009 speech that, "[f]lash orders may create a two-tiered market by allowing only selected participants to access information about the best available prices for listed securities."

Last month the SEC voted unanimously to propose regulations that would ban flash trading. If the regulations are adopted, they would effectively prohibit all markets, including equity exchanges, options exchanges and alternative trading systems, from displaying marketable flash orders. The Commission is seeking public comment and data on a broad range of issues relating to flash orders, including the costs and benefits associated with the proposal. It is also seeking comment on whether the use of flash orders in the options markets should be evaluated differently than their use in the equity markets.

The proposed ban on flash orders is just one part of a broader effort by the SEC to more effectively regulate the U.S. stock market in the wake of last year's financial crisis.