Flash trading is fading away at Direct Edge.
The ECN, which last year endured heavy criticism over its flash trading program, is executing a dwindling amount of shares through the service.
In December, less than 5 percent of Direct Edge’s volume was executed under its Enhanced Liquidity Provider program, which involves flashing quotes to a select group of traders. That compares to more than 15 percent in December 2008.
In absolute terms, Direct Edge executed just 52 million shares via the ELP program in December, down from 169 million in December 2008. The peak was 201 million shares in March 2009.
The decline comes as the Securities and Exchange Commission is considering a ban on the practice of flash trading by exchanges and ECNs. Last September, the regulator proposed eliminating an exception to its core Quote Rule that permitted flash quotes.
Flash trading, as practiced by Direct Edge and one other electronic market center, involves briefly "flashing" an order to a select group of traders before routing it away to another market center. Critics have blasted the practice for a variety of reasons, including the charge that it creates a two-tiered market of haves and have-nots.
The decline in the contribution of Direct Edge’s ELP program began last March at the same time the ECN’s market share was spiking sharply upwards. From about 5 percent in July 2008, Direct Edge grew its market share to a high of 12.9 percent in August 2009. The controversy over flash orders, on the other hand, did not flare up until May and only became widely known in August.
Direct Edge says the decline in the ELP trading is due to the rise in its market share, not because of customers snubbing the service due to the controversy. As more liquidity builds up on its books, more orders are executed there and fewer enter the flash process, a Direct Edge spokesperson explained.
"More liquidity and a higher match rate on our books means less chance for an ELP execution," the executive said. "Our match rate has soared since March, from 60 percent to over 70 percent. Thus the drop in ELP is not a surprise."
Nevertheless, the ECN is protesting the SEC’s move to ban flash trading. "The positive aspects of flash technology have been understated," Direct Edge told the regulator in a letter, "[and] the concerns have generally been overstated and under-supported."
The comment period covering the SEC’s proposal ended November 23. The regulator has not made public any decision as of yet. Still, many in the industry expect the regulator to ban the practice in the cash equities market.
As Traders Magazine previously reported, one former SEC official expects the regulator to ban flash trading, but that market centers could replace the service with so-called "price-improvement" auctions such as those run by the options exchanges.
Robert Colby, a former deputy director of the SEC’s Division of Trading and Markets who is now an attorney at Davis Polk & Wardwell, said at an industry conference last year, that under the SEC proposal, orders that enter exchange price-improvement mechanisms would not be considered flash orders that would require display in the public quote stream.
