Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, September 18, 2009

SEC Proposes Ban on Flash Orders

The SEC unanimously 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.   If adopted, the proposed amendment would effectively prohibit all markets - including equity exchanges, options exchanges, and alternative trading systems - from displaying marketable flash orders.

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.

In its proposal, the Commission 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.  Public comments on today's proposal must be received by the Commission within 60 days after its publication in the Federal Register.

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