FOR IMMEDIATE RELEASE: August 4, 2009
SCHUMER ANNOUNCES THAT SEC PLANS TO BAN 'FLASH TRADES' THAT GIVE ADVANCE INFO TO CERTAIN TRADERS
In Personal Call With Schumer, SEC Chair Schapiro Pledges That A Ban On The Controversial Practice Is Imminent
Unfair Practice Gives Certain Traders Advance Knowledge of Buying and Selling Activity, Putting Retail and Institutional Investors At Unfair Disadvantage
Schumer, Having Urged SEC To Curtail Flash Orders In Letter Last Month, Praises Move
WASHINGTON, DC—U.S. Senator Charles E. Schumer (D-NY) announced Tuesday that the head of the Securities and Exchange Commission (SEC) has personally assured him that the agency plans to ban the practice of so-called “flash trading” that gives advance knowledge of stock orders to certain traders. SEC Chairman Mary Schapiro informed Schumer of the imminent ban—which she said would occur as part of a larger look at dark pools and high-frequency trading—in a personal phone call late Monday. The call came in response to a letter Schumer sent last month saying that the SEC should eliminate the practice or else he would offer legislation to do so.
In a statement Tuesday, Schumer praised the decision, adding that he believed the SEC would stay vigilant against future market innovations that might similarly harm transparency in the markets.
“We salute the SEC for moving forward with this ban that will restore integrity to the markets. The agency is absolutely making the right call by stepping up and ending this unfair practice,” Schumer said.
“It is also important to make sure flash orders aren’t just the tip of an iceberg lurking in the dark reaches of the market,” Schumer added. “There is a lot of mystery about what goes on in dark pools and in the realm of high-frequency trading generally. I am confident the SEC will be able to separate valid innovation from other practices that give certain traders an unfair advantage over others.”
Flash orders are a type of trade order used in high-frequency trading, a technique that has gained attention recently for contributing to the spike in trading volume and, according to critics, increased volatility on U.S. exchanges. According to one industry estimate, high frequency trading accounted for $21 billion in profits in 2008.
Flash orders allow sophisticated high-frequency traders to gain access to trading information before it is sent out widely to other traders. For a fee, the exchange will “flash” information about buy and sell orders for just a few fractions of a second before the information is made publicly available. These traders, using super-fast computers, can then act on that early information to trade ahead of the pending orders. The practice can influence the pricing of stocks, experts say.
Last week, two major exchanges that offer the service indicated they would go along with a potential ban. Both NASDAQ and the Kansas City-based BATS exchange publicly acknowledged that flash orders can pose an inherent threat to the integrity of the markets. Meanwhile, another provider known as DirectEdge has defended the technique as a necessary source of liquidity for exchanges.
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