SEC Seeks to Curb Lightning-Fast Flash Trading

August 5, 2009

(ChattahBox)—The U.S. Securities and Exchange Commission is casting a regulatory eye towards the controversial practice of “flash trading,’ currently in vogue on Wall Street. Critics of the practice say it affords traders an unfair advantage, allowing them to see competitors’ orders a fraction of a second before they are completed.

SEC Chairwoman Mary Schapiro ordered her staff to devise “an approach that can be quickly implemented to eliminate the inequity that results from flash orders.” Schapiro is also concerned with the growing unregulated practice of trading outside conventional systems, called “dark pools” where stock is traded anonymously

Sen. Charles Schumer (D-NY) is particularly incensed at Wall Street’s recent dubious practices saying, “It is also important to make sure flash orders aren’t just the tip of an iceberg lurking in the dark reaches of the market,” he said. There is a lot of mystery about what goes on in dark pools and in the realm of high-frequency trading generally.”

Trading outlets, such as Nasdaq OMX, BATS and Direct Edge use flash trading, but NYSE Euronext does not endorse the practice. Direct Edge in particular, has come under increasing scrutiny for its use of flash trades. The upstart company’s market share of daily volume has grown to 12 percent from about 1.5 percent in just two years.

High-frequency trading recently captured media attention when Goldman Sachs recently posted groundbreaking earnings soon after paying the Fed back its TARP bailout funds. Goldman admits to using high-frequency trading, but denies that it employs flash trading, by peeking at “client order flow,” before trading.

High-frequency trading and flash trades also ominously made the news recently when a Goldman software developer, Sergey Aleynikov was arrested for allegedly stealing proprietary software from his employer. Bloomberg referred to the software as Goldman’s “…doomsday machine.”

A prosecutor in the case noted, “The bank [Goldman Sachs] has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”



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