Securities and Exchange Commission chairwoman, Mary Schapiro, said Tuesday that she would seek to ban a type of high-speed financial trading known as "flash trading" as the first step in a broader review of activity in the markets for automated low latency trading. Schapiro said she had asked the agency to devise "an approach that can be quickly implemented to eliminate the inequity that results from flash orders."
The move follows quickly on a front page story in last Friday's New York Times critiquing "high-frequency trading" in general and flash orders in particular. That story prompted New York Sen. Charles Schumer to press the SEC for limits on flash trading and scrutiny of other automated trading practices.
"The Tip of an Iceberg"
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. 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.”
Low latency trading has become a big business for a number of players in the data center space, especially Equinix (EQIX) and Savvis (SVVS). In the wake of the Times' article, some market players that engage in flash trading defended the practice. “If these types of programs are banned, it will drive liquidity away from exchanges and perpetuate a two-tier market,” William O’Brien, chief executive of Direct Edge, told the Financial Times, noting that the Direct Edge system was available to any brokerage that wished to participate.
Basic Fairness or A Slippery Slope?
The financial industry's embrace of automated trading is a prominent example of the use of computing and data center technology to accelerate business activity, but some tech watchers wonder whether the same principles in play in the high-speed trading debate could be more broadly applied to other scenarios in which instant data comes into play.
"This isn't just a story about robot stock traders and the SEC; it's also a story about Twitter, Facebook and the Pushbutton Web," writes Marshall Kirkpatrick at ReadWriteWeb in a though-provoking post titled Could Real Time Information Be an Unfair Advantage?
"Could the real time web give some people such an unfair advantage over everyone else that non-early adopters of new technologies or people outside of marketing firms could be left out in the cold?," Kirkpatrick writes. "Presuming we're talking about important, actionable information online and not just real-time chat and fun - it's possible. The question is: will the most important parts of the real time web be open and democratized, or proprietary and shared only with those who can pay a high price for access? That question hasn't been answered yet."