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Banning Flash Orders Should be Just a Start

Posted by Larry Doyle on September 18, 2009 9:25 AM |

Joe Saluzzi of Themis Trading deserves special recognition for yesterday’s announcement by the SEC that it will propose the banning of flash orders. Why? Joe had the character and courage of his conviction to publicly highlight the inherent inequity involved in this corner of our economic landscape.

I have highlighted Joe’s work extensively here at Sense on Cents.  I do not speak for Joe, but I think he would agree that banning flash orders should only be the start to level the playing field on our equity exchanges. What other initiatives should be undertaken to promote a greater degree of transparency and integrity on our equity exchanges? I would promote the following:

1. Work with regulators overseas so that uniform measures are practiced across all global equity exchanges. The Europeans are certainly not bashful in highlighting shortcomings in American compensation practices within the financial industry. American regulators should work with these European central bankers so there is no ‘exchange arbitrage.’

2. Eliminate a ‘payment for order flow’ (otherwise known as rebates) for directing business to one exchange versus another. In layman’s terms, these rebates are known as ‘kickbacks.’ Be mindful that the London Stock Exchange stopped allowing rebates as of September 1st.

3. Eliminate ‘predatory algorithmic trading’ which also preys upon retail orders. Distinguish between qualified algorithmic trading versus predatory algorithmic trading.

4. Thoroughly review the integrity of dark pools which impacts liquidity.

In short, it is readily apparent that the SEC has allowed for the development and execution of a variety of trading practices which have not served the interests of EVERY investor. Why and how did this develop? The exchanges have become for profit enterprises. There is nothing inherently wrong with for profit exchanges. That said, there is plenty wrong with unfair trade practices promoted by exchanges and not properly overseen by the regulators.

I am baffled as to how trade practices, such as flash orders, do not seemingly have to withstand a rigorous review PRIOR to their being rolled out. Is the development and implementation of flash orders not the equivalent of a new drug hitting the market prior to being officially reviewed and approved by the FDA? What is wrong with this picture?  In my opinion, once again the regulators have been exposed as more aligned with the financial industry than they are with fulfilling their mandate to protect investors.

These regulators should not be allowed to take a victory lap for banning flash orders without addressing the entire gamut of unfair trade practices currently polluting our equity exchanges.


Related Sense on CentsCommentary:
   Review of Sense on Cents Interview with Joe Saluzzi on High Frequency Trading (August 3, 2009)
   Is Uncle Sam Manipulating the Equity Markets? (July 1, 2009)

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