SEC Moves Closer to Flash Trading Ban

SEC Chairwoman Mary Schapiro says she has ordered staffers to come up with a system to eliminate any competitive disadvantages.
Author:
Publish date:

(Updated with Mary Schapiro comments.)

WASHINGTON (

TheStreet

) -- The government is moving closer toward eliminating a controversial trading method called "flash trading," the chairwoman of the

Securities and Exchange Commission

said Tuesday.

High-frequency trading has become a contentious topic because it provides select stock traders with information to make trades before the information is broadly distributed. SEC Chairwoman Mary Schapiro said she has been "concerned" by flash orders and other types of behind-the-scenes trading action called "dark pools." After a review of exchanges and electronic trading systems, she has ordered staffers to come up with a system to eliminate any competitive disadvantages.

"I have asked the staff for an approach that can be quickly implemented to eliminate the inequity that results from flash orders," Schapiro said in a statement.

Schapiro noted that any proposal will need to be vetted by the SEC after a public comment period.

Schapiro's statement came later in the day after a high-profile lawmaker leading the congressional charge against flash trading said he expects the commission's "imminent" approval of just such a proposal.

"The bottom line is, this practice will be eliminated," Sen. Charles Schumer (D., N.Y.) said in an emailed statement, in which he also said Schapiro had "personally assured" him in a phone call that the agency plans to ban the practice imminently.

Pre-Trade or Front Running?

Image placeholder title

Customers of

Nasdaq OMX Group

(NADQ)

, Bats Global Markets, Direct Edge Holdings and the CBOE Stock Exchange can pay a fee to gain information about stock orders just milliseconds before it is distributed to users of competing platforms.

NYSE Euronext

(NYX)

does not offer a similar service, but has said it may have to if something is not done to change this competitive disadvantage.

Schumer, who holds spots on the Senate Banking Committee, the Banking, Housing and Urban Affairs Committee and the Joint Economic Committee, sent Schapiro a letter on July 24, asking her to address the issue.

Flash trading gained more attention after a

Goldman Sachs

(GS) - Get Report

trader was arrested last month on charges of stealing trading formulas from the firm. Goldman and other market makers like

Morgan Stanley

(MS) - Get Report

,

Bank of America

(BAC) - Get Report

and its

Merrill Lynch

division,

Wells Fargo's

(WFC) - Get Report

Wachovia,

Credit Suisse

(CS) - Get Report

,

Deutsche Bank

(DB) - Get Report

and

UBS

(UBS) - Get Report

may all need to tweak certain trading strategies to respond to a change in rules.

"We salute the SEC for moving forward with this ban that will restore integrity to the markets," Schumer said in his earlier statement. "The agency is absolutely making the right call by stepping up and ending this unfair practice."

-- Written by Lauren Tara LaCapra in New York

.