New York senator Charles Schumer, who wrote to the US Securities and Exchange Commission (SEC) last Monday urging a ban on so-called flash order types, said commission chairman Mary Schapiro has pledged to fulfil his wishes.
Schumer issued a statement yesterday asserting that Schapiro personally assured him that the commission plans an “imminent” ban on the controversial order type during a private telephone conversation late on Monday. According to the statement, Schapiro said the restriction on flash orders would form part of a larger review of dark pools and high-frequency trading.
“We salute the SEC for moving forward with this ban that will restore integrity to the markets. The agency is absolutely making the right call by stepping up and ending this unfair practice,” Schumer said on his website.
Flash order types – which include BATS’s BOLT, fellow US exchange Nasdaq’s FLASH and equity trading platform Direct Edge’s Enhanced Liquidity Provider (ELP) programme – typically display unfilled orders on a venue for 25 milliseconds before routing elsewhere. Although Direct Edge’s ELP programme has been in place for around three years, flash order types have come under greater scrutiny this year due to a shift in market share toward venues that offer them and more a general concern about the impact of high-frequency and non-displayed trading on US equity markets.
Depending on the venue, the order types display unfilled orders either on the relevant venue’s data feeds to all members or a select group of liquidity providers. However, ‘flashes’ do not appear on the US consolidated tape.
There are two main points of controversy over flash orders. First, because unfilled marketable orders are not routed immediately, they contravene the spirit of Regulation NMS’s order protection rule, which compels routing to the venue with the best price.
The second, and Schumer’s main concern, is that the 25-millisecond flash period prior to execution could give high-frequency traders the opportunity to trade ahead of the original order.
Schumer added in the statement that both Nasdaq and BATS had said last week that they would support a ban on flash orders. BATS CEO Joe Ratterman issued a statement last Thursday saying his firm supported a ban based on a list of six potential concerns, among them the potential for creating a two-tiered market and the fact that the flashes do not appear on the consolidated tape.