Online Brokerages Split On Benefits of 'Flash' Orders
Sifma, NYSE Euronext, request the SEC to shutter flash programs
June 15, 2009
Two of the largest online brokerages--Charles Schwab and TD Ameritrade--are divided on whether the exchanges' programs to flash orders briefly to dark liquidity providers before routing them to other exchanges helps or hinders their businesses and the long-term effects on their retail customers.
At the same time, two other major financial-industry players--electronic trading powerhouse Getco Inc. and the Securities Industry and Financial Markets Association (Sifma)--submitted comment letters June 4 voicing dismay about Nasdaq's new pre-routing order flashes to users of its private quote-data feed.
In fact, Sifma, and a week earlier, NYSE Euronext--the only major exchange not to have begun such a program--requested the SEC to shutter the flash programs recently initiated by Nasdaq and BATS Exchange until they undergo the full regulatory review process.
The Securities and Exchange Commission's mandate is to protect retail investors, so two of the largest retail brokerages coming down on opposite sides of the issue complicates an already gray area from a regulatory perspective.
"We're concerned about these programs on a couple of levels," says Jeff Brown, head of legislative and regulatory affairs at San Francisco's Charles Schwab.
Brown says accessing an exchange's private quote-data feeds, in order to make use of the pre-routing displays, will increase costs. Also, Brown says, the private feeds, which provide more detailed quote information, could give trading firms an advantage over retail and other investors relying on the consolidated public quote stream known as SIP.
"Investors should be allowed to know all the information available at any given moment to make reasonable decisions," Brown says, adding, "That's the whole reason we have consolidated quote information."
Meanwhile, TD Ameritrade has used electronic communication network (ECN) Direct Edge's Electronic Liquidity Provider (ELP) program nearly since its inception more than three years ago. Chris Nagy, managing director of order routing, sales and strategy at the Omaha-based firm, says the ELP program has given retail investors access to dark (or un-displayed) liquidity and the improved prices that result. That is a capability that previously has been available mainly to institutional investors.
"We saw this program working so well that we've increased our utilization of it," Nagy says.
Pre-routing displays were pioneered by options exchanges about five years ago to give them an additional brief window to execute orders before routing them to other exchanges displaying the best bid and offer.
Direct Edge was the first equity-execution venue to offer the functionality starting in spring 2006. A year later, the CBOE Stock Exchange (CBSX) was approved by the SEC and launched with a program that briefly displayed orders that couldn't be filled at the exchange and canceled those that couldn't be matched by liquidity providers.
The CBSX's program never gained much popularity. However, Direct Edge's has taken off over the last six months. The ELP program has nearly tripled its volume in the last year, from 69.3 million shares executed in June 2008 to 171.5 million in May 2009, according to Direct Edge. This growth prompted Nasdaq and BATS to launch their own versions, called Nasdaq Flash Orders BATS Optional Liquidity Technology (BOLT), over the last few weeks. In May, Direct Edge officially applied to become an exchange that will include the ELP program.
