SEC Considers Putting Kibosh on 'Flash' Trading

The U.S. Securities and Exchange Commission (SEC) has formally proposed a ban on the practice of "flash" trading where large financial companies get access to stock trading information fractions of a second before that information becomes available to the trading public.

The SEC had previously noted that the advance information gave some traders an unfair advantage on others by allowing them to trade ahead of pending buy and sell orders using superfast computers.

SEC chairwoman Mary Schapiro had expressed her concern about the practice and had ordered a review of all flash trading activities earlier this year. On Thursday, the commission acted on those concerns by voting unanimously to propose a ban on flash trading.

The proposal will remain open for public comment for the next several weeks. If adopted, it would effectively ban equity exchanges, options exchanges and alternative trading systems, from displaying flash orders, the SEC said in a statement.

The SEC's move is sure to allay some of the concerns over the practice raised in the U.S. Senate recently. In a letter to Schapiro in July, Sen. Charles Schumer (D-N.Y.) urged the SEC to consider banning the practice because it was creating a two-tiered system where a privileged group of insiders was receiving preferential treatment. The practice, he noted, deprived some of a "fair price" for their transactions and threatened to undermine the confidence of ordinary investors.

In his letter, Schumer also warned that if the SEC failed to act, the Senate would step in.

In a statement announcing the proposed ban, Schapiro relied on some of the same language used earlier by Schumer to justify the move. "Flash orders may create a two-tiered market by allowing only selected participants to access information about the best available prices for listed securities," Schapiro said. The "momentary head-start" it gives can produce inequities, she said.

Flash orders are offered by a number of stock exchanges, including the Nasdaq, Jersey City-based DirectEdge and BATS Exchanges Inc. of Kansas City. For a fee, these exchanges flash, or make available, information about buy and sell orders a few milliseconds before the one-second limit by which that the information is supposed to become publicly available under current SEC Regulation National Market System regulations. Large financial companies then use superfast computers to transact on the information before anyone else has even had a chance to see it, let alone act on it.

The practice is seen by some as having contributed to the high volatility on U.S. stock exchanges and accounted for $21 billion in profits in 2008 for companies that took advantage of it.

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