Subject: File No. S7-21-09
From: Mark Nielson, Ph.D.
Affiliation: MacroEcon LLC

October 12, 2009

or at least less costly than regulation employed to ban the practice.

While a ban on flash trading may have agreeable political, cosmetic and public relations consequences for its proponents it is unlikely to improve market transparency nor is any ban likely to advance any other social or economic good. The written comments in this forum to the contrary mostly fail to see the forest of the exchange system for the trees of their own circumstances. Here is a more realistic view of the situation:

FIRST, Senator Schumer is naive of financial markets if he believes banning flash trading will - in a global sense - end every manifestation of the practice. Under any ban, those trades currently filled on the flash system will likely be filled elsewhere, perhaps overseas, perhaps in some other alternative venue. As an example, big trades have already fled the kind of over-regulation Sen. Schumer seeks to advance and this has been a loss to everyone interested in observing market prices. These large trades have moved to dark pools and if these are closed alternative venues will certainly arise faster than Sen. Schumer and his colleagues will close them. Sadly, any such alternative systems are likely to be LESS TRANSPARENT than the current system. Thus, the net effect of the regulatory schemes of Sen. Schumer and the SEC will be to drive market prices from public view. Of course this will reduce the SEC's ability to (a) curtail Ponzi schemes, (b) stop trading on non-public information and (c) conduct all other categories of market monitoring.

SECOND, Sen. Schumer and the SEC fail to recognize that even if no alternatives for flash trades (as discussed above) emerge, market transparency and fairness is still likely not served by the ban. Why? Because, flash trades start as a general offering to all traders in an exchange. If there is no fill - that is if no exchange member accepts the offer - then the trade is "flashed" to participating (and paying) out-exchange market participants. The flash offer exists for so short an instant that only high-speed program trading can take advantage of it (by the way, this evinces that only high speed operations can be harmed if harm there be). As such the paying "flash" traders may have an advantage over outside traders, but not over in-exchange traders. It is thus highly hypocritical to ban flash trades without banning the competitive system of exchanges which allows first-choice among exchanges' own member traders. With the ban those currently paying for flash trades will simply: (a) join the exchange outright (in doing so, maintaining their access to trade prices outside groups cannot attain) or (b) quit trading in the exchange. In the latter case they merely join the outside group enlarging that set of traders without primary access to trades. In either case it is hard or impossible to make the case that either transparency OR fairness will be greatly served by a flash trading ban. Indeed it is more likely a ban's benefits will be - at very best - marginal. It is more likely the ban will yield less transparency.

The SEC and Sen. Schumer should cease wasting regulatory and legislative resources on "transparent" cosmetic public relations projects which can have negligible benefit and should instead direct resources towards seeking-out Ponzi schemes and insider trading - areas which manifestly need improvement.