SEC Proposes Ban on 'Flash' Trades

WASHINGTON (TheStreet) -- The Securities and Exchange Commission has proposed prohibiting flash trading, a practice that gives some traders an edge when buying and selling stocks.

The SEC says a flash order enables a person who hasn't publicly displayed a quote to see orders less than a second before the public is given an opportunity to trade with those orders. Critics have decried the practice, saying it gives high-speed traders an advantage.

"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, in a statement Thursday. "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."

The flash trading proposal was unanimously approved, 5-0, by the commission. The changes, which were opened to public comment for 60 days, could eventually be adopted by the agency, perhaps with revisions.

Nasdaq OMX Group(NDAQ Quote), which operates the Nasdaq Stock Market, and the BATS exchange have voluntarily stopped using flash orders, which made up an estimated 3% of stock trading. The New York Stock Exchange has never used them.

Democratic Sen. Charles Schumer, a strong critic of flash trading, said Thursday the "proposal will once and for all get rid of flash trading, which if left untouched, could seriously undermine the fairness and transparency of our markets."

Meanwhile, the SEC also voted to unanimously to improve the quality of credit ratings by requiring greater disclosure by the credit ratings agencies and fostering competition in an industry dominated by three firms: McGraw-Hill's (MHP Quote) Standard & Poor's, Moody's(MCO Quote) and Fitch.