SEC works to eliminate inequality that results from flash orders

The Securities and Exchange Commission Chairwoman Mary Schapiro said in a statement on Tuesday that it is working to create a rule to ban trades that give some brokerages a split-second advantage in buying or selling stocks. According to Sen. Charles Schumer, D-N.Y., a critic of the orders, Schapiro personally assured him the SEC would ban the practice. Last month, Schumer sent a letter to the SEC urging it to eliminate flash orders and said that if it didn't, he would write legislation to do so.

A trading practice, known as flash orders, gives certain members of exchanges including Nasdaq, Direct Edge and BATS the ability to see buy and sell order information for milliseconds before the orders are made public. High-speed computer software can take advantage of that brief period to allow those members to get better prices and profits.

In addition, Sang Lee, a managing partner at Aite Group, said that banning flash orders, which make up only around 2 % or 3 % of total trading volume, is more about the perception of fairness than any practical change in trading. The move to ban flash orders would not have a major impact on the market share of exchanges, Lee said. The long-term trend of established exchanges such as the New York Stock Exchange losing business to newer participants such as Direct Edge and BATS will continue, regardless of whether they can attract customers through flash order programs, he said.

Exchanges have become increasingly competitive as they try to add more clients. However, that has led to price cuts on what exchanges charge customers, which has pressured profit margins in recent quarters. Thus, BATS spokesman Randy Williams said the company began offering flash orders because of increasing competition and it supports any review of flash orders. "We're ready to discuss it if the SEC asks about it," he said.