SEC Proposes Flash Order Ban

by Glen Shapiro, LawAndTax-News.com, New York

24 September 2009

The Securities and Exchange Commission (SEC) has proposed a rule amendment that would prohibit the practice of flashing marketable orders.

A flash order enables a person who has not publicly displayed a quote to see orders less than a second before the public is given an opportunity to trade with those orders. Investors who have access only to information displayed as public quotes may be harmed if market participants are able to flash orders and avoid the need to make the order publicly available.

"Flash orders may create a two-tiered market by allowing only selected participants to access information about the best available prices for listed securities," said SEC Chairman Mary Schapiro. "These flash orders provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes."

Currently, flash orders are permitted as result of an exception to Rule 602 of Regulation NMS that exempts these orders from requirements that apply generally to other orders. The Commission is concerned that the Rule 602 exception may no longer be necessary or appropriate in today's highly automated trading environment.

The SEC voted unanimously to propose the elimination of the flash order exception from Rule 602. If adopted, the proposed amendment would effectively prohibit all markets – including equity exchanges, options exchanges, and alternative trading systems – from displaying marketable flash orders.

The SEC is seeking public comment and data on a broad range of issues relating to flash orders, including the costs and benefits associated with the proposal. It also seeks comment on whether the use of flash orders in the options markets should be evaluated differently than their use in the equity markets.

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