WASHINGTON (CN) – Acting on a request by New York Sen. Charles Schumer, the Securities and Exchange Commission has proposed a ban on so called “flash orders,” which allow high speed and high volume traders to gauge demand for a stock before traders on other exchanges get to bid.
Flash orders originated on trading floors and were meant for instant execution or immediate refusal of bids made live, on the floor, and it was impractical to keep track of every terminated transaction when reporting bids to the public or traders not on the floor.
According to Schumer, Nasdaq OMX Group Inc., Bats Exchange Inc. and Direct Edge Holdings Inc. hold such orders for milliseconds, giving their customers access to order flow information before that information is made available to the public.
Traders that receive the flashed order information have about a second or less to respond with their own order to execute against the flashed order at a price that matches the national best offer for flash orders to buy and the national best bid for flash orders to sell.
As a result, although all those who subscribe to market’s data feed will receive the flashed order information, only market participants with pre-programmed systems capable of responding very rapidly will have a realistic opportunity to respond to a flashed order.
If the SEC adopts a total ban on flash orders, all orders seen by more than one trader that are either immediately executed or withdrawn if not immediately executed, must be provided to a national securities exchange or association for inclusion in quotation data.