The International Securities Exchange would like the Securities and Exchange Commission to continue to allow flash orders, but with a twist. Instead of disseminating the flash information to a limited audience, that information could be disseminated to everyone, the exchange said.
Doing so would avoid charges that information is seen only by a select group of people, said Gary Katz, CEO of the ISE. Flash orders could also be made optional for all market participants whose orders are about to be routed to a better-priced venue, he said.
"There are changes we could make to how flash orders are disseminated, so that we could continue to provide the benefits of flash orders and remove the concerns that regulators as well as investors in the marketplace have," Katz said. He added that the SEC and the industry "should not jump to ban certain practices" that some investors may want.
Bans, he said, are a drastic measure. "A good analogy is the current process taking place at the SEC on short selling," Katz said. "Instead of banning short selling altogether, the SEC is looking to implement mechanisms to ensure it’s being done properly."
The SEC, Katz said, could create a special designation so flash orders in options can be published for all to see by the Options Price Reporting Authority. "Market centers would have to work with the SEC and the industry on how to show those orders," Katz said. "If you showed them and there was no differentiation between them and a quote, that would lock the market. So it would require a thoughtful solution, but it is certainly possible to implement."
A locked market occurs when one market center publishes a bid (offer) at the same price as another market center’s offer (bid). Locking another market is not permitted either in equities or options. Flash orders, by definition, are aggressive orders that would lock the market if they’re publicly displayed.
BATS Exchange, which offers flash orders in equities, has also argued that these orders should be displayed publicly through the consolidated tape. In a July 30 newsletter, CEO Joe Ratterman said "BATS would prefer that BOLT quotes [its version of flash orders in equities] be publicly disseminated through the consolidated tape. They represent better priced orders and we believe they need to be published widely to the entire industry." Both BATS and Nasdaq OMX Group said earlier this month, in the wake of widespread criticism of flash orders, that they would voluntarily withdraw those order types by Sept. 1.
Ratterman believes locked markets should be allowed by regulators. After pointing out, in his newsletter, that BATS publishes flash order information on the exchange’s market data feeds, he noted: "The only place you can’t find BOLT orders is in the consolidated tape, and we would post them there too if the regulatory structure allowed it. Simply stated, the BATS implementation made flashed quotes available to as wide an audience as [is] currently allowed by securities law."
More recently, BATS clarified its position. The exchange suggests that marketable orders that seek liquidity only on a particular exchange, rather than those that would otherwise be routed to another market, should be included in the consolidated tape. Orders seeking liquidity on a particular exchange would be cancelled if they do not get filled at the market’s best price. BATS does not think routable orders should be delayed by exchanges, even for a few milliseconds.
Direct Edge, an ECN, enables participant firms on its market to request information about equities flash orders so they can choose to respond to those orders if they want to in the allotted time. It has not withdrawn its "enhanced liquidity provider" program, which enables some participants to see orders that other firms have decided to flash. The ISE owns 31.5 percent of Direct Edge.
The ISE’s Katz notes that investors can reap benefits from the use of flash orders. In options, he said, they can get more size and avoid paying access fees on some exchanges. Public customers using flash orders on pro-rata options exchanges can avoid the fees their trades would incur if their orders were routed to an exchange quoting the industry’s best price but which charges a fee to liquidity takers. (The ISE has written a position paper on flash orders that is available on request.)
Flash orders enable market makers on pro-rata exchanges, Katz said, to match the best price elsewhere. Pro-rata exchanges do not charge public customers for executions. Exchanges such as NYSE Arca Options, for instance, have a different model that charges all participants for taking liquidity from their book (and pays them for providing liquidity).
Ed Boyle, head of NYSE Euronext’s U.S. options business, notes that flash orders unfairly reveal information about marketable orders that should be executed immediately by the market quoting the best price. "We don’t agree with flash," he told Traders Magazine last week. "We route out immediately if we’re not the best market. We don’t slow the order down and disclose it to participants." NYSE Euronext, which is a critic of flash orders in both equities and options, has argued that flash orders create a two-tiered market for information that disadvantages customers.
In options, several pro-rata exchanges as well as the Boston Options Exchange, which does not have a pro-rata model for options quoted in penny increments, offer flash orders. This allows their participants to match the industry’s best price if they’re not quoting at the best price or if they do not have enough size to fill marketable orders.
