Chairman Mary L. Schapiro
September 17, 2009
We are considering a recommendation to propose an amendment to the Commission’s rules that would prohibit the practice of flashing marketable orders. Flash orders provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes.
The reason that flash orders are currently permitted stems from an exception to the Exchange Act quoting requirements. That exemption originated back when most trading took place on the floors of the exchanges.
In today’s highly automated trading environment, the exception for flash orders from quoting requirements, while potentially providing benefits to certain traders, may no longer serve the interests of long-term investors or the markets. The Commission has consistently stated that the interests of long-term investors should be upheld as against those of professional short-term traders, when those interests are in conflict.
Concerns have been raised that the use of flash orders by exchanges and other markets may detract from the fairness and efficiency of the national market system. Specifically, flash orders have the potential to discourage the public display of trading interest and harm quote competition among markets.
This occurs because a flash order allows certain participants to view an order before others that publicly display their quotes. The unfairness results because those getting that advance look do not have to publicly display a quote for everyone else to see, yet are able to rely on the information provided by the publicly displayed quotes to facilitate their transactions.
As a result, flash orders have the potential to significantly undermine the incentives to display limit orders and to quote competitively. In addition, flash orders may create a two-tiered market by allowing only selected participants to access information about the best available prices for listed securities.
Investors that have access only to information displayed as public quotes may be harmed if market participants are able to flash orders and avoid the need to make the order publicly available.
I would note that other market practices may have similar opaque features. As such, the Commission is continuing to review other forms of dark trading that lack market transparency and I expect that initiatives in this area will be considered in the near future.