Alliance Of Floor Brokers

Direct Edge duels with senator on proposed flash orders crackdown

By Michael Mackenzie and Joanna Chung in New York and, Jeremy Grant in London

Published: July 27 2009 03:00 | Last updated: July 27 2009 03:00

Calls by a US senator to ban flash orders – trades made at lightning speed on electronic systems – have met resistance from a market provider.

Direct Edge, the electronic share trading network, hit back yesterday at comments from Charles Schumer, a senior Democrat on the Senate banking panel, who has called for a clampdown on how equity prices are displayed to investors on electronic systems.

The practice of flashing orders across electronic platforms helps providers of market liquidity, many of them high-frequency traders with powerful computer systems, to attract “buy” and “sell” orders from investors.

Critics, notably Mr Schumer, senator for New York, contend that flash orders are not being shown to all investors at the same time, creating a two-tier market.

This, they say, favours traders with faster and more powerful trading systems.

Mr Schumer sent a letter late last week to the Securities and Exchange Commission requesting that it curb the use of flash orders by Nasdaq OMX and the trading platforms Direct Edge and BATS.

If the regulator fails to act, Mr Schumer plans to introduce legislation in the Senate seeking to prohibit the use of flash orders.

William O’Brien, chief executive of Direct Edge, said: “If these types of programs are banned, it will drive liquidity away from exchanges and perpetuate a two-tier market.”

The Direct Edge system was available to any brokerage that wished to participate, he said.

BATS said any trading group could submit flash orders with its system and it was “ready to participate in an industry review of potential issues associated with them, including the possibility that they create a two-tier market”.

Nasdaq OMX also allows flash orders. NYSE Euronext does not and wants the practice stopped.

“We are waiting to see how the regulatory landscape develops,” said Joe Mecane, NYSE Euronext’s chief administrative officer for US equities markets.

“We have been vocal about our opposition to flashing orders.”

Flash orders have come under increasing scrutiny as US securities regulators look for ways to regulate “dark pools”. The anonymous venues, which do not display public quotes for stocks, have flourished.

Copyright The Financial Times Limited 2009

Senator Schumer reacts to the recent public outcry of High Frequency trading tactics taking advantage of the investing public.

Senator Wants Restrictions on High-Speed Trading
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Published: July 24, 2009
A high-ranking lawmaker has asked the Securities and Exchange Commission to prohibit a trading technique that enables some large banks and hedge funds to peek at investors’ stock orders before they are sent to the broader marketplace.

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Senator Charles E. Schumer wrote to the S.E.C. saying he intended to introduce legislation barring flash orders.

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Stock Traders Find Speed Pays, in Milliseconds (July 24, 2009) The technique, known as flash orders, gives high-frequency traders using lightning-fast computers an unfair advantage, Senator Charles E. Schumer, the New York Democrat who is chairman of the Senate rules and administration committee, said in a letter to the S.E.C. Mr. Schumer wrote that he intended to introduce legislation barring the technique, if the agency failed to act.

“The hallmark of our markets are that they are open and above board and the little guy has as much of a chance as the big guy,” Mr. Schumer said in an interview. “This takes a dagger to the heart of that concept.”

The S.E.C. declined to comment on Mr. Schumer’s letter, though some officials acknowledged they were investigating the technique and expected new regulations to be issued by this fall.

When buy or sell orders are submitted to marketplaces like Nasdaq, they are sometimes flashed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — before they are routed to everyone else. In that half-second, fast-moving computer software can gain valuable insights regarding growing or declining demand in certain stocks, and can trade ahead of other market participants, pushing prices up or down.

Although anyone can gain access to flash orders by paying a fee, they are useful only to traders who have computers powerful enough to act on the data within milliseconds. In recent years, some of the largest financial companies, including Goldman Sachs, have earned enormous profits with such computers, which are very expensive and often housed right next to the machines that power the marketplaces themselves.

While markets are supposed to ensure transparency by showing orders to everyone simultaneously, flash orders are currently allowed because of a loophole in securities regulations that allows for immediate trades.

“I’m against anything that advantages anybody over the rest of the market, and this clearly does, even though it’s momentary,” said Arthur Levitt, who headed the S.E.C. from 1993 to 2001, and today works as an adviser to Goldman Sachs and Getco L.L.C., one of the largest high-frequency trading firms.

The exchanges that offer flash orders — Nasdaq, Direct Edge and BATS — all declined to comment on Mr. Schumer’s letter. In the past, Nasdaq has defended flash orders. A company spokesman, Wayne Lee, wrote that the market’s “hope is that by having the ability to Flash participants, this functionality will make our customers more competitive.”

This debate comes amid growing concern over high-frequency trading, which has helped push the average daily volume on the nation’s stock exchanges up by 164 percent since 2005. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for more than half of all trades and collected about $21 billion in profits last year, according to the research firm the Tabb Group.

More Articles in Business » A version of this article appeared in print on July 25, 2009, on page B6 of the New York edition.

High Frequency Trading Debate on CNBC 7/24/09

The issue of High Frequency trading continues to be in the spotlight.  Read this article for the latest.
http://www.nytimes.com/2009/07/24/business/24trading.html

This paper has created a lot of buzz about high frequency trading on the street. A must read to understand how some firms are taking advantage of the investing public.

www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdf