SEC Proposes Flash Order Ban

The Securities and Exchange Commission voted 5-0 to propose a ban on flash orders. Why?

According to the Wall Street Journal, flash orders can be used by large traders a for proftable edge. Certain traders are allowed a “sneak peek” at market activity and regulators are concerned about the unfair advantage.

Photo by timtak, courtesy of flickr

According to Bloomberg, last month SEC Chairman Mary Schapiro asked her staff to draft rules that “eliminate the inequity” caused by flash orders.

Flash orders account for a small percentage of high-speed trading, however high-speed trading may account for “as much as 70 percent of share volume” in the United States, said Patrick O’Shaughnessy of Raymond James.

Flash orders are drawing criticism as of late since the SEC is reviewing several “market structure” issues.

The history of flash orders goes back to 1978, when exchanges tried to electronically recreate a trader placing an order. Before technology advanced, traders actually had to communicate orders to floor brokers before the orders were input into the system. The system then showed all bids and offers.

Now that the human element has been severely cut back, computers calculate when to place trades and execute them. The time saved can also result in lightning fast profits.  Computers can trade shares 1,000 times faster than the blink of an eye.

I am pleased to see the SEC moving to address the inequity created by practices like flash orders, and I don’t want to sound pessimistic, but there will always be people who are in the know and people who are not.

Markets are inefficient, and as long as they are inefficient, there will be opportunities to exploit those inefficiencies. Unfortunately, regulators are forced to play catch up, and by the time they get caught up there are new inefficiences being exploited.