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SEC to ban advance looks at stock trading orders

Section: Daily Dispatches

By Edgar Ortega
Bloomberg News
Tuesday, August 4, 2009

NEW YORK -- The U.S. Securities and Exchange Commission plans to ban flash trades that give some brokerages an advance look at orders, U.S. Sen. Charles Schumer said, citing a conversation with SEC Chairman Mary Schapiro.

Schumer said Schapiro "personally assured him that the agency plans to ban the practice" in a phone call yesterday, according to a statement. In a separate statement, Schapiro said she has asked her staff to "eliminate the inequity" that flash orders cause.

"It's preferencing one group over another, and that's not the way markets should work," said Michael Panzner, author of "The New Laws of the Stock Market Jungle" and a former trader for George Soros' hedge fund. "It certainly on its face seems unfair and up until now was against the spirit, now perhaps against the actual rules, of fair play."

A ban would reverse decisions since at least 2004, when SEC first approved the systems at the Boston Options Exchange. Nasdaq OMX Group Inc., Bats Global Markets, Direct Edge Holdings LLC, and the CBOE Stock Exchange give information to their clients about orders for a fraction of a second before the trades are routed to rival platforms.

"We salute the SEC for moving forward with this ban that will restore integrity to the markets," Schumer said in an e-mail. "The agency is absolutely making the right call by stepping up and ending this unfair practice."

Schapiro said any proposal to ban the transactions would require approval from SEC commissioners.

Flash orders represented 2.4 percent of the total shares traded in June, according to the New York brokerage Rosenblatt Securities Inc. At Direct Edge, which handles most of the flash volume, revenue from its Enhanced Liquidity Provider program has helped it cut other trading fees and more than double its market share since November.

Schumer told the SEC in a July 24 letter to prohibit flash orders, saying he would propose legislation barring them if the agency didn’t act.

Flash systems trace their roots as far back as 1978 to efforts by exchanges to electronically replicate how a trader might yell an order to floor brokers before entering it into the system that displays all bids and offers.

Nasdaq shares fell as much as 3.1 percent to $20.78 after Schumer's statement. NYSE Euronext, an exchange owner that doesn't use flash orders, added up to 2.7 percent to $27.50.

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