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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Opening Statement at SEC Open Meeting — Flash Orders


Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

Washington, D.C.
September 17, 2009

Thank you, Chairman Schapiro. I, too, would like to thank the Division of Trading and Markets for all your hard work in preparing for today's open meeting. I would especially like to thank Dan Gray for his excellent work on this release. Your depth of expertise and guidance on issues relating to market structure have been a great asset to this agency. I would also like to thank the staff in the other divisions and offices who have worked on the proposal before us today.

I am happy to support the staff's proposal.

Flash orders have been in use for many years but have become increasingly popular in recent months as more exchanges and other markets adopted the practice. Although flash orders make up a small fraction of overall trading, I believe it is important for the Commission to evaluate the use of flash orders and their market structure implications in today's increasingly highly automated environment.

While flash orders may potentially provide benefits to certain market participants, such as lower transaction costs, increased liquidity, and choice to the trading community, today's action reflects the Commission's concern that flash orders may not fit well with the Commission's fundamental policy objectives for the securities markets, including price transparency, public quoting, fair competition, and best execution of investor orders.

In particular, the Commission has long emphasized the importance of displayed liquidity in promoting efficient equity markets and has acted over the years to encourage the display of trading interest. For example, the Commission adopted Regulation NMS to establish market-wide protection of displayed quotes against trade-throughs at inferior prices. To the extent flash orders allow select market participants to execute orders at the same price as the public quote without taking on the same risk of being publicly displayed, the use of flash orders could discourage the public display of trading interest and harm quote competition among markets.

I am also concerned that flash orders may create a two-tiered market in which only select market participants receive order information about the best available prices for listed securities and impair price discovery in the public markets. If the practice of using flash orders were to continue and expand in trading volume, the use of flash orders by exchanges and other markets potentially could detract from the fairness and efficiency of the national market system.

I also see this proposal as an initial step in a series of actions by the Commission as it examines various market structure issues that arise from developments in the automated equities and options markets, including dark pools and indications of interest, Regulation ATS thresholds, sponsored access, high frequency trading, and co-location. The Commission is looking closely at all of these matters to determine whether they raise policy concerns that are analogous to flash orders or otherwise may be detrimental to the fairness and efficiency of the national market system. However, as the Commission engages in this exercise, I would caution that, in our discussions of various market developments, we must be careful not to confuse the different issues — they have different potential benefits and raise different concerns. And, I would urge that we move forward, in the near term, with respect to direct market access, which, to me, presents particular risks and concerns.

I think it's also important to recognize that the markets have never been more efficient than they are today. In the face of sharp spikes in volume and volatility and the recent economic crisis, markets in listed securities continued to operate in an efficient and orderly manner and were at all times accessible to investors. Although improvements are still needed, the markets' reliable performance may be due to their constant evolution and modernization. With this in mind, the Commission must take a very deliberative and thoughtful approach in its review of the issues surrounding market structure particularly in this automated trading environment. The Commission must carefully weigh the positive elements of market developments against the potential that two-tiered markets and other inequities could emerge and harm investors. It should consider whether principles and precedents based on floor-based trading should apply to the present electronic environments and take into account the effect any action by the Commission could have on innovation, competition, and efficiency in the securities markets.

In this regard, I view this proposal as a useful first step, and also a valuable opportunity for public discussion — of the market implications of flash orders as well as other forms of dark liquidity and what role dark liquidity should have in our national market system. I look forward to considering other additional Commission initiatives in this area in the near future. I believe these actions will help the Commission determine ways to maximize the fairness and efficiency of the national market system for investors and thereby increase public confidence in the securities markets.

Thank you.


Modified: 09/18/2009