A Flash in the Pan?

Over the summer there has been a lot of controversy surrounding the future of "flash" order types and whether their benefits to individual traders and investors outweigh the detriment to the current market structure.

In late July, US Senator Charles Schumer wrote to Mary Schapiro, chairwoman of the US Securities and Exchange Commission (SEC), requesting the SEC prohibit flash order types because they "allow certain members of these exchanges to obtain access to order flow information before the information is made available to the public, allowing those members to use rapid trading programs to trade ahead of those orders and profit from advanced know-ledge of buying and selling activity."

The senator's letter contained a number of misconceptions about these order types. Flash orders do not give exchange members preferential access to order flow information over non-members-but there is a bit of nuance to this. Firms that take direct feeds from the exchanges and venues that offer flash order types will see those orders reflected in the market data feed. However, since flash orders have the ability to lock the individual markets, they will not appear on the consolidated tape, which prohibits the printing of locked quotes. Broker-dealers, or anyone relying solely on the consolidated tape feed, therefore, might not get a true sense of what market liquidity is like.

Secondly, flash orders are not the exclusive domain of high-frequency traders. Any broker-dealer that is a member of an exchange or ECN offering flash orders can execute these orders. The order can be retail, a single institutional order, or one that's part of a high-frequency trading strategy. There is no favoritism in terms of who can use this order type.

Finally, flash orders do not provide front-running opportunities for trading any more than any other order type. If they did, it is unlikely the SEC would have approved the order type in the first place, which it did when the CBOE Stock Exchange (CBSX) applied for exchange status.

Since Schumer sent his letter with its not-so-veiled threat-asking the SEC to address the issue or he would introduce legislation banning the order types-Schapiro has commented that the SEC would indeed review flash orders. Two days after the release of Schapiro's prepared statement, Nasdaq OMX and Bats Exchange announced that they would voluntarily cease support for their respective flash and Bats Optional Liquidity Technology (Bolt) orders on Sept. 1.

The same day, DirectEdge ECN announced that it would withdraw a proposed rules change to introduce its flash order type, which was going to be dubbed Flare. However, the ECN plans to maintain its existing Exchange Liquidity Provider (ELP) program. The CBSX has been quiet on the subject, not issuing a statement.

It appears that the current understood arrangement between the exchanges will reduce the volume of flash orders, but until the SEC makes a final determination, they remain a legal and approved order type that any exchange or ECN can implement.

For the health of the market and to prevent a bifurcated market system where subscribers of direct exchange feeds get a better view of the market's liquidity versus those taking in the consolidated tape, the SEC and exchanges need to come up with another offering that can provide similar price improvement that doesn't come at the expense of the current market structure.

Rob Daly

Rob Daly is editor of Dealing with Technology and can be reached at

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