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US regulators propose ban on 'flash' trading

Published on Sunday, September 20, 2009 Email To Friend    Print Version

WASHINGTON (Reuters) - U.S. securities regulators on Thursday proposed a ban on flash orders that stock exchanges send to a select group of traders fractions of a second before revealing them publicly.

The Securities and Exchange Commission is seeking to curb a practice criticized for giving an unfair advantage to some market participants who have lightning-fast computer trading software.

The agency also tightened rules on credit rating agencies by imposing more disclosure requirements and encouraging unsolicited ratings. Those moves, and others proposed by the SEC, took aim at a ratings industry widely criticized as having fueled the financial crisis through over-generous ratings assigned to toxic mortgage-backed securities.

The proposed ban on flash orders is part of a broader effort by the SEC to crack down on obscure corners of the U.S. stock market.

SEC Chairman Mary Schapiro said the agency will keep reviewing trading practices that may give an unfair advantage to some market players. “Other market practices may have similar opaque features,” Schapiro said.

Supporters of high-frequency trading practices such as flash trading say they add needed liquidity to the markets, and allowed the markets to function smoothly during the financial crisis.

But critics, including some lawmakers, say the markets need to be better policed so all investors are operating on an even playing field.

The SEC will put its proposal out for public comment for 60 days, and will later schedule a meeting to decide whether to adopt the proposal. The agency said it will seek feedback on on the cost and benefits of the proposed ban, and whether the use of flash orders in options markets should be evaluated differently from those in equity markets.

In July, Senator Charles Schumer, a New York Democrat, told the SEC to curb flash trading and threatened the agency with legislation if it failed to do so.

Schumer said in a statement on Thursday that flash trading could seriously undermine fairness and transparency in markets.

“This ban, as proposed, is pretty much water-tight and should not be weakened by the commission as the rule-making process goes forward,” he said.

Over the summer, some exchanges “flashed” buy and sell orders to their member firms, meaning they showed the orders to specific firms before sending them to the wider market.

Joe Mecane, NYSE Euronext’s executive vice president of U.S. markets, has said flashes were “a relatively small debate that evolved into a very large debate.”

While NYSE Euronext’s New York Stock Exchange did not adopt the flashes under scrutiny, Nasdaq OMX’s Nasdaq Stock Market and privately-held BATS Exchange recently canceled the services. At most, flashes represented less than 3 percent of U.S. equity trading volume.

All five SEC commissioners voted to propose the flash trading ban, but some were cautious about overreaching in reviewing other opaque market practices.

Troy Paredes, a Republican commissioner, said investors ultimately benefit from regulatory restraint. “Exchanges and other trading venues need flexibility to innovate new products, services and trading opportunities,” he said.

Democratic commissioner Elisse Walter also cautioned against too broad a crackdown and said each trading practice should be examined separately and carefully.

“They have different potential benefits and different concerns,” Walter said.

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